2.bShow that pi = 8 will not do the job. (Hint: The question is whether ahigh-cost incumbent find mimicking this strategy profitable.) Suppose there is only 1 consumer who has a demand of a product up to 1 unit perperiod. There are 2 periods. Her willingness to pay is $10 per unit.There are two firms, I and E. Firm I is the incumbent and is the only producer inthe 1s period. Firm E is the potential entrant with 0 marginal cost but must incuran entry cost of $1 if entering this market.Firm I knows its marginal cost (c) but Firm E does not know for sure: it knows c iseither 0 or 5. Without any further information/signal, Firm E believes theprobability for either case is 50%.The timing of the game is the following:• Firm I sets the price in the 1" period (pi);• Firm E makes its entry decision;• Were “not enter" chosen, Firm I will remain as a monopoly in the 2"dperiod and set the price at $10.Were “enter" chosen, the two firms engage in Bertrand competition in the2nd period.Lastly, assume both firms have a discount factor of 0.8.

The Bertrand model is used to analyze competition between firms in a market where they produce…

Suppose there is only 1 consumer who has a demand of a product up to 1 unit per period. There are 2 periods. Her willingness to pay is $10 per unit. There are two firms, I and E. Firm I is the incumbent and is the only producer in the 1st period. Firm E is the potential entrant with 0 marginal cost but must incur

Suppose there is only 1 consumer who has a demand of a product up to 1 unit per period. There are 2 periods. Her willingness to pay is $10 per unit. There are two firms, I and E. Firm I is the incumbent and is the only producer in the 1st period. Firm E is the potential entrant with 0 marginal cost but must incur

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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