Question

Vivian has monopoly power as a dog walker in her neighborhood. Her long-run total cost function is CV= 0.5V2+ 2 where V is the number of dogs she walks. Dawa has recently moved into the neighborhood. Her long-run total cost function for dog walking is CD= 0.5D2+ 10. Market demand is P = 80 –2Q where Q is the number of dogs walked: Q = D + V. Provide a labelled residual demand diagram to illustrate how Vivian could implement a Predatory Pricing plan that would limit competition in the market.

Answer 1

To limit competition in the market, Vivian can implement a predatory pricing plan by lowering her price below her long-run average cost. This can be illustrated with a labeled residual demand diagram.

Step-by-step explanation:

To implement a predatory pricing plan that limits competition in the market, Vivian could lower her price below her long-run average cost in order to drive Dawa out of the market. By doing so, Vivian can increase her market share and potentially discourage new entrants from entering the market. This can be illustrated with a labeled residual demand diagram, showing Vivian's initial demand curve and how it changes after she implements the predatory pricing plan.