It is uncertain (odds are 50-50) whether Firm X will enter a new market in the next three months. Firm Y is thinking of entering the same market but won't be ready to do so for six months. Firm Y expects to earn $4 million if it is the sole market supplier but will lose $6 million if it must share the market with Firm X. If Firm X employs an optimal entry strategy, its overall expected profit (before Firm X has made its move is:
A) $0 (it should never enter).
B) $4 million (it should enter if Firm X does not).
C) $2 million (it should enter if Firm X does not).
D) $3 million.
E) $2 million (it should always enter).

Question

Quizplus · Accepted Answer

If Firm X enters, Firm Y's profit will decrease by $6 million to $-2 million. Thus, if Firm Y enters, it will do so only if it is the sole supplier, in which case it will earn $4 million. The expected profit for Firm Y if it enters the market is therefore $2 million. 
For Firm X, if it enters and is the sole supplier, it will earn $8 million. However, if it enters and must share the market, its profit will decrease by an uncertain amount, so we cannot calculate its expected profit. 
Therefore, Firm X's optimal entry strategy is not to enter, which means that Firm Y will still enter and earn $2 million. Hence, Firm X's overall expected profit (before making a move) is also $2 million.

It Is Uncertain (Odds Are 50-50) Whether Firm X Will