Currently there is an incumbent monopoly in a market. Next year, a potential entrant may enter the market. Suppose that the potential entrant first makes a decision to either ‘enter’ or ‘not enter’ the market. If the potential entrant chooses ‘enter’, then the incumbent can choose to either ‘lobby’ or ‘not lobby’ the government to impose a tax on the potential entrant. If the incumbent chooses to ‘lobby’ then this imposes a cost on it of 20 dollars, but as a result, the government passes a law that places a tax of 60 dollars on the potential entrant if it chooses to enter the market. If the potential entrant chooses to not enter the market it makes zero profit, and the incumbent firm makes the monopoly profit equal to 100 dollars. If the potential entrant enters the market and the incumbent chooses not to lobby, then both firms earns the duopoly profit of 50 dollars. If the potential entrant enters the market, and the incumbent chooses to lobby, the potential entrant earns the duopoly profit of 50 dollars, minus the tax, and the incumbent earns the duopoly profit, 50 dollars, minus the lobbying costs. The best strategy for the potential entrant is to: [To answer this question, you’ll need to take into account your answer to question 4 about the best strategy for the incumbent firm.] a.Choose to ‘enter’ b.Choose to ‘not enter’ c.Choose either to ‘enter’ or ‘not enter’ because the incumbent is indifferent between those strategies d.It is not possible to identify the best strategy for the potential entrant

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Currently there is an incumbent monopoly in a market. Next year, a potential entrant may enter the market. Suppose that the potential entrant first makes a decision to either ‘enter’ or ‘not enter’ the market. If the potential entrant chooses ‘enter’, then the incumbent can choose to either ‘lobby’ or ‘not lobby’ the government to impose a tax on the potential entrant. If the incumbent chooses to ‘lobby’ then this imposes a cost on it of 20 dollars, but as a result, the government passes a law that places a tax of 60 dollars on the potential entrant if it chooses to enter the market. If the potential entrant chooses to not enter the market it makes zero profit, and the incumbent firm makes the monopoly profit equal to 100 dollars. If the potential entrant enters the market and the incumbent chooses not to lobby, then both firms earns the duopoly profit of 50 dollars. If the potential entrant enters the market, and the incumbent chooses to lobby, the potential entrant earns the duopoly profit of 50 dollars, minus the tax, and the incumbent earns the duopoly profit, 50 dollars, minus the lobbying costs. The best strategy for the potential entrant is to: [To answer this question, you’ll need to take into account your answer to question 4 about the best strategy for the incumbent firm.]

a.Choose to ‘enter’

b.Choose to ‘not enter’

c.Choose either to ‘enter’ or ‘not enter’ because the incumbent is indifferent between those strategies

d.It is not possible to identify the best strategy for the potential entrant

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