1. Suppose that the market demand is described by P = A – B(Q+q) where P...

1. Suppose that the market demand is described by P = A – B(Q+q) where P is the market price, Q is the output of the incumbent firm, and q is the output of the potential entrant to the market. The incumbent’s total cost function is C(Q) = c1Q, whereas the cost function of the

entrant is C(q) = c2q+F.
a. If the entrant firm observes the incumbent producing Q* units of output and expects

this output level to be maintained, what output q will the entrant produce?
b. How much output would the incumbent firm have to produce to just keep the entrant

out of market?
c. If the entry occurs, does the incumbent firm really produce the output in part b?

Suppose that upon entry, these firms play a Cournot game.

Expert Solution

Rahul Sunny answered 8 months ago

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