1. Consider a homogeneous product industry with inverse demand given by p 100 2Q. Variable cost is given by C = 10q. There is currently one incumbent firm and one potential competitor. Entry into the industry implies a sunk cost of F. 1.a) Determine the incumbent's optimal output in the absence of potential competition. 1.b) Suppose the entrant takes the incumbent's output as given. Show that the entrant's equilibrium profit is decreasing in the incumbent's output. 1.c) What output should the incumbent firm set to deter entry? 1.d) Determine the lowest value of F such that the incumbent firm prefers to deter entry.

1. Consider a homogeneous product industry with inverse demand given by p 100 2Q. Variable cost is given by C = 10q. There is currently one incumbent firm and one potential competitor. Entry into the industry implies a sunk cost of F. 1.a) Determine the incumbent's optimal output in the absence of potential competition. 1.b) Suppose the entrant takes the incumbent's output as given. Show that the entrant's equilibrium profit is decreasing in the incumbent's output. 1.c) What output should the incumbent firm set to deter entry? 1.d) Determine the lowest value of F such that the incumbent firm prefers to deter entry.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter11: Price And Output Determination: Monopoly And Dominant Firms

Section: Chapter Questions

Problem 4E

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