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Unformatted text preview: Economics 467 Spring 2010 Karl Dunz Problem Set 4 due Monday April 12 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. [15 points] Consider a situation involving an existing monopoly and a potential entrant in an industry. The existing monopoly has either high costs or low costs. Of course, the monopoly knows its costs; however, the potential entrant does not. Let 0 < u1D45D < 1 be the probability that the monopoly has low costs. Before the potential entrant must decide whether or not to enter this industry, the monopoly decides to build a plant with either high capacity or low capacity. The potential entrant observes the capacity of the monopolists plant before making its decision on entry. The payoffs to the two firms are as follows. If the potential entrant stays out of the industry then it receives 0 while the monopoly receives 15 if it has low costs and has high capacity, 12 if it has low costs and low capacity, and 8 if it has high costs (independent of its capacity). If entry occurs then the entrant receives 1 in all situations except when the monopoly has high capacity and low costs, in which case the entrant receives 1....
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