In: Economics
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.