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Given the success of his Texas establishment, Diablo is considering whether to expand his operations and open a second Diablo Steak Palace on the Nevada Strip. Naturally, Salamanca, who pioneered the concept of selling over-the-top steaks to big-spenders already has a branch of his famous Naans Steakhouse on the Strip. Diablo and Salamanca have engaged in extensive market research and have determined that the inverse demand curve for over-the-top steaks in Nevada is given by P=1,90005Q. Both restaurants have a marginal cost of $100 per steak and would compete on quantity. Naturally, if he were to choose to enter the Nevada market, Diablo would spare on expense in designing his new steakhouse, and would incur a fixed cost of entry of $4,000,000. a. Prior to learning about Diablo's potential entry, Salamanca enjoyed a monopoly in the Nevada over-the-top steak market. What were his output and profits, and what was the market price for an over-the-top steak when he was the only player in the Nevada over-top-steak game? b. Diablo is considering his options. If Diablo were to enter the market, he knows that Salamanca would enjoy a first-mover advantage. That is, Salamanca would choose his output first, and then Diablo will choose his output taking Salamanca's output as given a la Stackelberg. What would Salamanca's and Diablos output and profits be, and what would the market price for an over-the-top steak be under this scenario? c. Show that if Salamanca were to set his output at 18,200, then it would be unprofitable for Diablo to enter the market. Given an output of 18,200 , what profits would Salamanca earn, and what would the price of a gold-crusted steak be? d. What is the minimum output Qd that Salamanca would need to set to make it unprofitable for Diablo to enter the market? We refer to the output level Qd as the entry deterrent output. e. Now assume that Salamanca were to continue to set the monopoly output despite Diablo's po Could Diablo earn a profit in the market? f. Given the answers to b-e, what output should Salamanca set? Would you characterize Diablo's

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