2. Two firms- -an incumbent I and an entrant E- can produce an identical good at...

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2. Two firms- -an incumbent I and an entrant E- can produce an identical good at a cost of c> 0 per unit. The incumbent chooses its quantity q1 ≥ 0 first. The entrant chooses its quantity që ≥ 0 after having observed 91. The price is then given by the inverse 1 demand function is p = a − 91 − qɛ, with a > c. The entrant faces an entry fee ƒ ≥ 0 if it produces a positive quantity; that is, the entrant's cost of producing is 0 if qe = 0 and f + cq if që > 0. The incumbent faces no such fee so its cost of producing is cq₁. Both firms are profit maximisers and, for simplicity, assume that if a firm is indifferent among multiple quantities, it chooses the smallest one. (a) (15 points) Fixing an incumbent quantity q1, find the optimal entrant quantity. (b) (30 points) Calculate the equilibrium quantities set by the two firms. (c) (15 points) Briefly provide intuition for your result in (b). [max: 100 words] 2. Two firms- -an incumbent I and an entrant E- can produce an identical good at a cost of c> 0 per unit. The incumbent chooses its quantity q1 ≥ 0 first. The entrant chooses its quantity që ≥ 0 after having observed 91. The price is then given by the inverse 1 demand function is p = a − 91 − qɛ, with a > c. The entrant faces an entry fee ƒ ≥ 0 if it produces a positive quantity; that is, the entrant's cost of producing is 0 if qe = 0 and f + cq if që > 0. The incumbent faces no such fee so its cost of producing is cq₁. Both firms are profit maximisers and, for simplicity, assume that if a firm is indifferent among multiple quantities, it chooses the smallest one. (a) (15 points) Fixing an incumbent quantity q1, find the optimal entrant quantity. (b) (30 points) Calculate the equilibrium quantities set by the two firms. (c) (15 points) Briefly provide intuition for your result in (b). [max: 100 words]

Answer rating: 100% (QA)

a To find the optimal entrant quantity we need to solve the following problem Maximize profit p qE ... View the full answer