1. Consider a market of homogeneous products in which firms compete on quantity. Demand in this market is
given by
q(p) = 72 - 6p: (1)
There are both an incumbent firm M and a potential entrant E which can both produce the good at marginal
costs 6. Prior to entry, E must incur an entry cost equal to Ce ? 0.
(a) Suppose that Ce = 1. What are the equilibrium price, quantity for each firm, and profit for each firm?
(b) Suppose that Ce = 0. What are the equilibrium price, quantity for each firm, and profit for each firm?
(c) What is the maximum value of Ce for which E does not make a loss if it enters?
(d) What is the maximum value of Ce for which it is optimal from a welfare perspective (i.e. total surplus)
for E to enter? (At the maximum value it is also optimal for E not to enter.)

Answer rating: 100% (QA)

To summarize weve found a When Ce 1 Equilibrium price ... View the full answer