[4] Suppose an incumbent firm (A) holds a cost advantage over a potential entran

Question

[4]       Suppose an incumbent firm (A) holds a cost advantage over a potential entrant (B). That is, A and B’s total costs are given by:

A:     TCA = 100QA, where QA is the quantity A produces

B:     TCB = 200QB, where QB is the quantity B produces

Suppose the market demand is Q = 1200 - 2P, where Q is the market quantity and P is the market price.

Initially, suppose A is an incumbent monopolist (i.e., B is currently not in the market), what is the monopoly price, quantity, and profit? Invoking the Sylos Postulate, how much would B want to produce (i.e., B enters the market) if A stuck to the monopoly quantity? What would be A’s profit if B entered the market? Now, what would be the limit price A could set to keep B out of the market? What is A’s profit at this limit price? Is this a case of blockaded entry, effectively impeded entry, ineffectively impeded entry, or free entry? Explain.

Explanation / Answer

TCA = 100QA
MCA=100
Q = 1200 - 2P
TR=1200P-2P2
MR=1200-4P

MC=MR
100=1200-4P
4P=1200/100
4P=12
P=3

Q=1200-2(3)
=1200-6
=1194

TCB = 200QB
MC=200
MR=1200-4P
MC=MR
200=1200-4P
4P=1200/200
4P=6
P=1.5

Q=1200-2(1.5)-1194
=6-3
=3

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