Suppose that the industry demand curve is given by P = 120 – 2Q. The monopolist/incumbent...

Suppose that the industry demand curve is given by P = 120 – 2Q. The monopolist/incumbent faces MCM=ACM=40. a)

a) Solve for the profit-maximizing level of monopoly output, price, and profits.

b) Suppose a potential entrant is considering entering, but the monopolist has a cost advantage. The potential entrant faces costs MCPE=ACPE=60. Assuming the monopolist/incumbent continues to produce the profit-maximizing quantity from part a), solve for the residual demand curve for the entrant.

c) Assume the potential entrant follows the Cournot assumption about the monopolist’s output (i.e., believes the monopolist will not change its quantity fixed once the entrant has entered). Solve for the potential entrant’s output, the industry price, and the potential entrant’s profit. What are the new monopoly profits?

d) What price should the monopolist/incumbent set to prevent entry, i.e., what is the limit price?

e) What is the profit of the monopolist when it charges the limit price?

Expert Solution

Rahul Sunny answered 2 years ago

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