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/3.If A innovates and B does not,A earns $30 in revenue while B earns $10.If A innovates and B does likewise,both firms earn $20 in revenue.If neither firm innovates,both earn $10.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/3.If A innovates and B does not,A earns $30 in revenue while B earns $10.If A innovates and B does likewise,both firms earn $20 in revenue.If neither firm innovates,both earn $10.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 innovates, firm B will have an incentive to adopt if the setup cost is less than the increase in revenue. The increase in revenue is $20 - $10 = $10. Therefore, firm B will have an incentive to adopt if C < $10.

There Are Two Existing Firms in the Market for Computer