Firm 1 is an incumbent in a market that Firm 2 is considering entering. Market demand is described by P = 500 − (q1 + q2) Firm 1 has no fixed costs of production. The entrant has a fixed cost of $15,000 that is incurred only if it enters the market. Each unit of output requires 1 unit of capacity to produce. There are no other inputs of production. Both firms buy capacity in the same market where its price is r = 50. The cost functions of the two firms are therefore: C1 (q1) = rq1 C2 (q2) = 15,000 + rq2 (a) Consider the Stackleberg version of this game: Firm 1 produces an output level first, which it cannot change. Firm 2 then makes its entry decision, and, if it enters, an output decision. Compute the quantity qL1 (the limit quantity) which if it was produced
Firm 1 is an incumbent in a market that Firm 2 is considering entering. Market
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