Q4. Entry, Exit & Predation (20 points) Suppose that the inverse demand function is described by: P = 100-2(9192), where qi is the output of the incumbent firm and q2 is the output of the entrant. Let the labor cost per unit w 20 and capital cost per unit be r = 20. In addition, let each firm have a fixed cost of F = F = $100. = (a) (4 pts) Suppose that in stage one the incumbent invests in capacity K. Show that in stage two the incumbent's best response function is q = 20 - 92/2 when 91 K; and 91 = 15 92/2 when 91 > K. (b) (4 pts) Show that the entrant's best response function in stage two is 92 91/2. = 15- (c) (4 pts) Now show that if the incumbent commits to a production capacity of 15, the entrant will do best by producing 7.5 and earn a profit of $12.5, while the incumbent earns a profit of $125.