Consider a good for which the per-period inverse- demand is p = v — Q. There are two periods and no discounting. There is an incumbent firm I that has marginal production cost c₁ < 1 in the first period. In the second period, its marginal production cost is C₂ = C₁ — λq₁, where 9₁ is its output in the first period and € (0,2). a. Show that the incumbent will produce q₁ = 1-C₁ 2-λ . Interpret it with respect to λ. Suppose now that there is a potential entrant E that might enter in the second period. It has marginal production cost C = C₁ and no cost of entry. Because of the latter, for the sake of clarity, suppose that the entrant always enters but may produce zero (in which case it does not enter de facto). The two firms compete in quantities. b. Find the equilibrium in the second period given some C2. c. How does q₁ affect the incumbent's and entrant's profits in the second period? d. Find the equilibrium value of q₁. When is entry blockaded, deterred and accommodated, respectively?

Consider a good for which the per-period inverse- demand is p = v — Q. There are two periods and no discounting. There is an incumbent firm I that has marginal production cost c₁ < 1 in the first period. In the second period, its marginal production cost is C₂ = C₁ — λq₁, where 9₁ is its output in the first period and € (0,2). a. Show that the incumbent will produce q₁ = 1-C₁ 2-λ . Interpret it with respect to λ. Suppose now that there is a potential entrant E that might enter in the second period. It has marginal production cost C = C₁ and no cost of entry. Because of the latter, for the sake of clarity, suppose that the entrant always enters but may produce zero (in which case it does not enter de facto). The two firms compete in quantities. b. Find the equilibrium in the second period given some C2. c. How does q₁ affect the incumbent's and entrant's profits in the second period? d. Find the equilibrium value of q₁. When is entry blockaded, deterred and accommodated, respectively?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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