- 1. Suppose that market demand is described by P = 100 – Q – q, where P is the market price, Q is the output of the inc

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1 Suppose That Market Demand Is Described By P 100 Q Q Where P Is The Market Price Q Is The Output Of The Inc 1 (121.83 KiB) Viewed 51 times

- 1. Suppose that market demand is described by P = 100 – Q – q, where P is the market price, Q is the output of the incumbent firm, and q is the output of a = 100+ 40q, where 100 is a sunk = potential entrant to the market. The incumbent firm's total cost function is C(Q) = 40Q. The cost function of the entrant is C(q) cost incurred to enter the market. A. If the entrant observes the incumbent producing Qo units of output and expects this output level to be maintained, write down the equation for the residual demand curve that the entrant firm faces. B. If the entrant firm maximizes profit given the residual demand curve in (A), what output de will the entrant produce? (Hint: your answer should be a function of Qo.) C. How much output would the incumbent firm have to produce to just keep the entrant out of the market? That is, solve for the limit output Q. At what price will the incumbent sell the limit output?