Quitting Time: When to Exit a Declining Industry1 We illustrated in the text the strategic issues that arise for a monopolist who is threatened by a potential entrant into the market—and in Chapter 26, we will investigate firm entry into an industry where demand increases. In this exercise, suppose instead that an industry is in decline in the sense that demand for its output is decreasing over time. Suppose there are only two firms left—a large firm L and a small firm S. A: Since our focus is on the decision of whether or not to exit, we will assume that each firm has fixed capacity ki at which it produces output in any period in which it is still in business; i.e. if a firm i produces, it produces x = ki . Since L is larger than S, we assume kL > kS. The output that is produced is produced at constant marginal cost MC = c. (Assume throughout that, once a firm has exited the industry, it can never produce in this industry again.) (a) Since demand is falling over time, the price that can be charged when the two firms together produce some output quantity x declines with time — i.e. p1(x) > p2(x) > p3(x) > … where subscripts indicate the time periods t = 1, 2, 3, If firm is the only firm remaining in period t , what is its profit πit ? What if both firms are still producing in period t? (b) Let ti denote the last period in which demand is sufficiently high for firm i to be profitable (i.e. to make profit greater than or equal to zero) if it were the only firm in the