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Unformatted text preview: Economics 467 Spring 2010 Karl Dunz Problem Set 3 due Wednesday March 31 You are encouraged to work in groups on these problems; however, you must turn in your own work, not a copy of what the group has done. Also, I will not accept any late assignments since I will post answers to these problems shortly after the due date. 1. [8 points] Consider a market with an incumbent monopoly and one potential entrant. Suppose that the market demand curve is given by u1D443 = 100 u1D444 and the marginal cost of production is zero for both firms. The monopoly has a current capacity of production equal to 30 units and has the possibility of expanding that capacity to 40 at a cost of $400. The potential entrant has the choice between not entering the market, in which case its profits are zero, and entering the market with a capacity of 20 at a cost of $900. Suppose that the monopoly makes its decision about whether or not to expand its capacity before the potential entrant decides whether or not to enter and...
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