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PS3_ECON160SSI10 - ECON 160 SUMMER 10 WANER GU UC RIVERSIDE...

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1 ECON 160, SUMMER 10 WANER GU UC RIVERSIDE PROBLEM SET #3 (Total Points: 40) DUE: 5pm, MONDAY, JULY 19, 2010 1. (12 points) Consider a two-period model with an incumbent firm that has cost function given by . 40 ) ( q q C = A potential entrant into the market has identical technology as the incumbent, but must also sink a fixed cost of $100 in order to set up a plant and enter the market. Both firms are choosing quantities as the strategic variable. Total market demand is given by P Q = 100 . 1.1) Find the best response of the entrant in the second period as a function of what the incumbent produces in the first period. 1.2) If the incumbent were to set a limit price (quantity) in a predatory sense in order to keep the entrant out of the market, how many units should the incumbent produce so that it is a best response of the entrant to produce zero output? What is the profit for the incumbent firm if this happens? 1.3) If the incumbent were to set a limit price (quantity) in a predatory sense in order to keep
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