1. Two firms, Incuumbent & Entron, can produce the same good. The market demand for the good is given by P = 180 – Q, where P is the market price and Q is the market quantity demanded. The firms must pay w = 45 per unit of output for labour and r = 45 per unit of output for capital (one unit of capital is used per unit of output), but Incuumbent may choose capacity K_I units of capital before Entron decides whether to enter the market. Suppose firms each have fixed costs F_I = F_E = 600. Incuumbent chooses (as a Stackelberg leader) capacity K_I equal to the monopoly profit-maximizing quantity. When you answer the following questions, show your work.

 

1. Find K_I. (1)

 

2. If Entron enters, what is the post-entry Incuumbent’s equilibrium quantity q_I* and what is the post-entry Entron’s equilibrium quantity q_E*? (1)

3. If Entron enters, what is the post-entry Incuumbent’s equilibrium profit π_I* and what is the post-entry Entron’s equilibrium profit π_E*? (1)

4. Is Incuumbent able to prevent entry by choosing capacity K_I equal to the monopoly profit-maximizing quantity? Explain. (1)

5. Does the Incuumbent’s choice of capacity K_I equal to the monopoly profit-maximizing quantity qualify as predatory conduct (here, limit output)? Explain. (1)