Answer Happy

Consider two firms, E and I, where firm E is a potential entrant and firm I is the incumbent in the industry. They play the following sequential game: First firm E decides whether to enter or stay out, and then firm I decides whether to produce high Q (output) or low Q (output). The payoffs from the game are given in the game tree below. The number before the comma is the payoff of firm E and the number after the comma is the payoff of firm 1. Answer the questions using the information of the game. High Q/(-3, 6) -3 Enter Low Q (8,8) E Stay out (0, 18) High Q Low Q (0,9) a. Should firm I produce high Q or low Q if firm E enters the market? Why? (4 marks) b. Should firm I produce high Q or low Q if firm E stays out from the market? Why? (4 marks) c. Should firm E enter the market? Why? (4 marks)