You are a new entrant in a market with just one incumbent, who sells a roughly equivalent product. You initially take on the follower role when it comes to choosing the amount of your product to manufacture. In researching your market, you’ve collected substantial data on prices and quantities and asked your firm’s analysts to determine as closely as possible the inverse demand curve for the market. They’ve reported back to you the following table:

Price regressed on Quantity:

a. Write down the estimated inverse demand curve for the market, and comment on whether it is precisely estimated.

b. Suppose your marginal costs are $2,000 and the incumbent produces 4,000 units. What is the profit maximizing quantity you should produce?

c. Suppose your marginal costs are $2,000 and the incumbent’s marginal costs are $1,500. What will be the market price if you and the incumbent produce at your respective profit maximizing levels?

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Coefficients Intercept 13693.75 Quantity -2.14 Standard Error 516.34 0.101 t-Stat 26.52 -21.18 P-value 4.69E-79 1.55E-60 Lower 95% 12677.45 -2.34 Upper 95% 14710.05 -1.95