Inverse demand for roof shingles is given by P= 10-Q/100. Each shingle costs 0.25 to produce....

Inverse demand for roof shingles is given by P= 10-Q/100. Each shingle costs 0.25 to produce. Firms compete in quantities.

1. Assume that fixed costs are zero and that there are two firms in this industry. Firm 1 is able to commit to its output level before firm 2 can. What will be the subgame perfect equilibrium quantities and profits of each firm?

Now suppose that there is a fixed cost of 2 to produce shingles. What is the smallest quantity firm 1 could produce and still deter entry by firm 2? How does this compare to the monopoly quantity?
Does firm 1 want to deter entry (i.e. is it profitable to deter entry)? What is the smallest fixed cost f for which deterring entry would be profitable?

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Rahul Sunny answered 1 year ago

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