Microeconomics (9th Edition) (Pearson Series in Economics)
9th Edition
ISBN: 9780134184890
Author: PINDYCK
Publisher: PEARSON
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Question
Chapter 13, Problem 10E
a)
To determine
Choices of technology
b)
To determine
Profit
c)
To determine
Social welfare
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1. Consider an industry with inverse demand given by p = 8 – q, where p is the price, and q is the quantity. There is one incumbent firm and one potential entrant. In the first stage of the game, the incumbent chooses its quantity qi. In the second stage, the potential entrant observes qi and chooses its quantity Ce. The potential entrant can also decide not to enter the market. The production technology of both firms are represented by the cost function C = 2q. To enter industry implies a fixed entry cost of F.
(a) Find the equilibrium of the game, assuming that the potential entrant enters the industry. What are the profits of firms?
(b) Assume that entry is not blockaded. For which values of F does the incumbent firm prefer to deter entry?
(c) For which values of F, entry blockaded?
The Able Manufacturing Company and Better Bettors, Inc. are rival firms in the production of a calculator used by horse racing fans for handicapping (determining betting strategies). Each firm has a fixed cost of $100 and a MC = $10 in producing calculators. The demand for the industry’s product is: Q = 900 – 5P, where P is the market price and Q = Q1 + Q2. If each firm must choose how many calculators to produce and sell without knowing of its rival’s production decision, what will be the Cournot equilibrium price and quantities produced? Calculate the profit for each firm.
Market demand is given by p= 12-Q. There are two firms; the incumbent firm (1) and the entrant firm (E). Incumbent moves first by choosing quantity q, from the interval [0.1]. The entrant observes q and decides whether or not to enter and how much to produce if he enters (qe). There is no fixed cost of entry. If the entrant decides to stay out, his profit is zero and the incumbent enjoys a monopoly position. Suppose that both incumbent and entrant have identical marginal costs equal to c= 8
a) What is the subgame perfect equilibrium of this game? What are the quantities produced by the incumbent and entrant? What are their profits?
b) What is the minimum quantity that must be produced by the incumbent to deter entry (to make entry unprofitable)? In this game, will the incumbent ever try to deter entry by increasing quantity?
Chapter 13 Solutions
Microeconomics (9th Edition) (Pearson Series in Economics)
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