Handwritten please. Thank you! Firm 1 must decide whether to enter an industry in which firm 2 is an incumbent.To enter this industry, firm 1 must choose to build either a plant with a smalloutput capacity (S), or large output capacity (L). A plant with small capacity costs$50 to set up; one with large capacity cost $175. In either case, the marginal costof production is zero. But firm 1 can also opt to stay out (O), in which case it doesnot incur any type of cost. Firm 2 is able to observe firm 1's decision beforedeciding whether to expand or not its initial small output capacity operation.Expanding (E) costs firm 2 $80, whereas not expanding (N) incurs no cost for thefirm. In either case, the marginal cost of production is also zero.The revenues under the different scenarios are given below.- If only one small firm exists, its revenue is $80, the other earns zero.If two small firms exist, each earns revenue of $70.- If only one large firm exists, its revenue is $200, the other earns zero.- If two large firms exist, each earns revenue of $90.- If one small and one large firm exist, the small firm earns $40, while the large oneearns $160.Answer the following:a) How many pure strategies are available for firm 1?b) How many pure strategies are available for firm 2?c) What is the sum of the firms' profits in the subgame perfect equilibrium?

Answered: Image /qna-images/answer/85887ec3-942b-47f6-9b3d-bd807faf7009.jpg

Firm 1 must decide whether to enter an industry in which firm 2 is an incuml To enter this industry, firm 1 must choose to build either a plant with a small output capacity (S), or large output capacity (L). A plant with small capacity $50 to set up; one with large capacity cost $175. In either case, the margina of production is zero. But firm 1 can also opt to stay out (O), in which case it not incur any type of cost. Firm 2 is able to observe firm 1's decision before

Firm 1 must decide whether to enter an industry in which firm 2 is an incuml To enter this industry, firm 1 must choose to build either a plant with a small output capacity (S), or large output capacity (L). A plant with small capacity $50 to set up; one with large capacity cost $175. In either case, the margina of production is zero. But firm 1 can also opt to stay out (O), in which case it not incur any type of cost. Firm 2 is able to observe firm 1's decision before

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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