Consider an industry with inverse demand P = 32 − 4Q. Theindustry has an incumbent firm (i) and a potential entrant (e).Each firm has a marginal cost of 0. The entrant pays a fixed costof 9 only if it enters the industry. Assume it enters the industryonly if its profits are greater than 0.
(a) What is the incumbent’s output as a monopoly without threatof entry?
(b) What is the incumbent’s output and profit with competitionfrom the entrant assuming the incumbent moves first and the firmscompete a la Stackelberg?
(c) What quantity must the incumbent produce to deter entry?(Hint: you must find the entrant’s profit for any value of qi .)Does the incumbent accommodate, deter, or blockade entry? Show yourwork and explain briefly.
