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If the Rhine Company ignores the possibility that other firms

Question # 00578173
Subject: Economics
Due on: 08/24/2017
Posted On: 08/24/2017 10:22 AM

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Analysing price decissions

If the Rhine Company ignores the possibility that other firms may enter its market, it should set a price of $10,000 for its product, which is a power tool. But, if it does so, other firms will begin to enter the market. During the next two years, it will earn $4 million per year, but in the following the next two years, it will earn $1 million per year. On the other hand, if it sets a price of $7,000, it will earn $2.5 million in each of the next four years, since no entrants will appears.

a. If the interest rate is 10 percent, should the Rhine Company set a price of $7,000 or $10,000? Why? (Consider only the next four years)

b. If the interest rate is 8 percent, should the Rhine Company set a price of $7,000 or $10,000? Why? (Consider only the next four years)

c. The results in parts a and b pertain to only the next four years. How can the firm's manager extend the planning horizon?

Tags firms poibility ignores company rhine years price 0 1 firms million earn company rhine consider year percent rate enter market appears results parts planning horizon extend manager pertain entrants hand tool power product ignores does

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