Problem 1:

Global Crossing is a major provider of fiber optic cable capacity - having a 70% market share. It is in possession of a technology that has the capability of expanding capacity (output) of its product by 20% without any increase in Global Crossing's cost. The overall market elasticity of demand for such capacity is - 0.6.

a) What will happen to the market price should Global Crossing introduce the new technology - assuming other competitors do not react to Global Crossing's action? Be specific and show your work.

b) What is the elasticity of demand facing Global Crossing - assuming other competitors do not react to Global Crossing's action? Show your work.

c) Is it profitable for the company to introduce the new technology and expand output of capacity? Explain.

d) If Global Crossing had only 20% of the market, would it have a different incentive than in part c)? Explain.