Limit Pricing Problem Consider a market where the overall demand function is P = 100 -Q -q, where P is the market price, Q is the incumbent's output and q is the output for a potential entrant. The entrant's cost function is C(q) = 100 + 40q, where 100 represents the sunk cost required to enter the market.

a. The entrant observes the incumbent producing Q* and expects it to continue to do so. What is the equation for the residual demand curved faced by the entrant?

b. Using the residual demand curve in a. calculate the entrant's profit maximizing quantity, q*. Remember the entrant's marginal costs = C'(q) = 40. Your answer should be a function of Q*.

c. Using your answers above, determine how much output the incumbent would have to produce to keep the entrant out of the market. That is, solve for the limit output, Q*.