2. Consider the following Stackelberg model with 2 firms. Let firm 1 be the incumbent and firm 2 the potential market entrant. • Incumbent firm faces a marginal cost of c = 4. • Potential entrant faces a marginal cost of c= 2 and entry cost F. • The market demand curve is P = 12 - Q. • The incumbent decides q first, then the potential entrant decides q2. 92 = 0 if firm 2 %3D decides not to enter. (a) What is the incumbent firm's monopoly price, quantity and profit? (b) Suppose F = 0. What are the equilibrium quantities and profits for both firms? What is the equilibrium price? (c) For which values of F is firm 2's entry into the market blockaded, accommodated or preyed upon? When firm 2's entry is preyed upon, which quantity, q1, does firm 1 use to dissuade firm 2 from entering? (d) Suppose that now F = 0 naturally. That is, there no is barrier to entry for firm 2. However, now suppose the firm 1 can spend a on creating artificial barriers to entry. For example, a may be the cost of litigation over extending expiring patents. Let F(x) = a x x be the fixed entry cost for firm 2 when firm 1 spends r. For which values of o does firm 1 prevent firm 2's entry?

2. Consider the following Stackelberg model with 2 firms. Let firm 1 be the incumbent and firm 2 the potential market entrant. • Incumbent firm faces a marginal cost of c = 4. • Potential entrant faces a marginal cost of c= 2 and entry cost F. • The market demand curve is P = 12 - Q. • The incumbent decides q first, then the potential entrant decides q2. 92 = 0 if firm 2 %3D decides not to enter. (a) What is the incumbent firm's monopoly price, quantity and profit? (b) Suppose F = 0. What are the equilibrium quantities and profits for both firms? What is the equilibrium price? (c) For which values of F is firm 2's entry into the market blockaded, accommodated or preyed upon? When firm 2's entry is preyed upon, which quantity, q1, does firm 1 use to dissuade firm 2 from entering? (d) Suppose that now F = 0 naturally. That is, there no is barrier to entry for firm 2. However, now suppose the firm 1 can spend a on creating artificial barriers to entry. For example, a may be the cost of litigation over extending expiring patents. Let F(x) = a x x be the fixed entry cost for firm 2 when firm 1 spends r. For which values of o does firm 1 prevent firm 2's entry?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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