Question

Suppose there are only two natural gas producers in Gloucester. In each period, firms determine how much natural gas to sell; market price is then determined by total demand and total supply. Marginal cost is given by 77 for Firm 1 and 74 for Firm 2. Currently, Firm 1 and 2 are producing at their optimal level, 170 and 200 respectively, whereas market price is 94. By making an important discovery in the process of hydraulic fracturing , Firm 2 managed to cut its marginal cost from 74 to 68.What impact do you expect Firm 2’s cost reduction to have on its market share?

Answer 1

The cost reduction of Firm 2 is likely to have a positive impact on its market share.

Step-by-step explanation:

The cost reduction of Firm 2 from 74 to 68 is significant and is likely to have a positive impact on its market share. By reducing its marginal cost, Firm 2 can now produce natural gas at a lower cost compared to Firm 1. This means that Firm 2 can potentially offer a lower price to consumers, giving it a competitive advantage and potentially attracting more customers. As a result, it is expected that Firm 2 will gain a larger market share due to its cost reduction.