Consider an industry with inverse demand P = 32 − 4Q. The industry has an incumbent...

Consider an industry with inverse demand P = 32 − 4Q. The industry has an incumbent firm (i) and a potential entrant (e). Each firm has a marginal cost of 0. The entrant pays a fixed cost of 9 only if it enters the industry. Assume it enters the industry only if its profits are greater than 0.

(a) What is the incumbent’s output as a monopoly without threat of entry?

(b) What is the incumbent’s output and profit with competition from the entrant assuming the incumbent moves first and the firms compete a la Stackelberg?

(c) What quantity must the incumbent produce to deter entry? (Hint: you must find the entrant’s profit for any value of qi .) Does the incumbent accommodate, deter, or blockade entry? Show your work and explain briefly.

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Expert Solution

Rahul Sunny answered 3 weeks ago

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