The city of Dustin is going to grant an exclusive contract to provide cable TV for the next year.The economic profit of the contract is thought to be $5 million.Firm 1 and firm 2 are competing for the contract.The firm that spends the most on lobbying will be awarded the contract.
-Refer to the information above.If firm 1 spends $2 on lobbying and firm 2 spends $1 on lobbying,the expected profit to firm 1 is __________ and to firm 2 it is __________.

Question

Quizplus · Accepted Answer

Since the city of Dustin will award the contract to the firm that spends the most on lobbying, firm 1 will win with a lobbying expenditure of $2. Therefore, firm 1 will earn an economic profit of $5 million from the contract, but will have to subtract the lobbying expenditure of $2, resulting in a profit of $4,999,998. Firm 2 will not win the contract and will not earn any profit, resulting in a profit of -$1.

The City of Dustin Is Going to Grant an Exclusive