There are two existing firms in the market for computer chips.Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not.Innovation incurs a fixed setup cost of C,while increasing the revenue.However,once the new technology is adopted,another firm,B,can adopt it with a smaller setup cost of C/2.If A innovates and B does not,A earns $20 in revenue while B earns $0.If A innovates and B does likewise,both firms earn $15 in revenue.If neither firm innovates,both earn $5.Under what condition will firm B have an incentive to adopt if firm A adopts the innovation? A) C 30 B) C C 0 D) 35 C 25

Question

There are two existing firms in the market for computer chips.Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not.Innovation incurs a fixed setup cost of C,while increasing the revenue.However,once the new technology is adopted,another firm,B,can adopt it with a smaller setup cost of C/2.If A innovates and B does not,A earns $20 in revenue while B earns $0.If A innovates and B does likewise,both firms earn $15 in revenue.If neither firm innovates,both earn $5.Under what condition will firm B have an incentive to adopt if firm A adopts the innovation?
A) C > 30
B) C < 30
C) 10 > C > 0
D) 35 > C > 25

Quizplus · Accepted Answer

If firm A adopts the innovation and gains a revenue of $15, then firm B will earn a revenue of $15 as well if they also adopt the innovation. However, if firm B does not adopt the innovation, they will earn $20 while A will earn $0. Therefore, firm B will only have an incentive to adopt if their revenue from adopting ($15) is greater than their revenue from not adopting ($20). This can be simplified as:

$15 > $20 - C/2

Multiplying by 2:

$30 > $40 - C

C > $10

Therefore, if the fixed setup cost C is less than $10, firm B will have an incentive to adopt if firm A adopts the innovation, and if C is greater than or equal to $10, firm B will not have an incentive to adopt.

Thus, the correct answer is B.

There Are Two Existing Firms in the Market for Computer