MegaCable and Acme are competing for an exclusive contract to provide the city of Dustin with cable television for the next year. The firm that wins the contract will earn an economic profit of $5 million. The contact will be awarded to the firm that spends the most on lobbying. If both firms spend the same amount on lobbying, then the winner will be determined by a coin flip, so each will have a 50 percent chance of winning.
Suppose MegaCable spends $2,000,002 on lobbying, and Acme spends $2,000,001 on lobbying. In this case, MegaCable's economic profit net of its lobbying costs will be ________, and Acme's economic profit net of its lobbying costs will be ________.

Question

MegaCable and Acme are competing for an exclusive contract to provide the city of Dustin with cable television for the next year. The firm that wins the contract will earn an economic profit of $5 million. The contact will be awarded to the firm that spends the most on lobbying. If both firms spend the same amount on lobbying, then the winner will be determined by a coin flip, so each will have a 50 percent chance of winning.  
Suppose MegaCable spends $2,000,002 on lobbying, and Acme spends $2,000,001 on lobbying. In this case, MegaCable's economic profit net of its lobbying costs will be ________, and Acme's economic profit net of its lobbying costs will be ________.

Quizplus · Accepted Answer

Since MegaCable spends more on lobbying than does Acme, MegaCable will win the contract. Thus, MegaCable's net economic profit will be $2,999,998 (= $5,000,000 - $2,000,002), and Acme's net economic profit will be -$2,000,001.

MegaCable and Acme Are Competing for an Exclusive Contract to Provide