Demand for a good is given by P = 5 ? Q. An incumbent firm has marginal cost of 2. An entrant has marginal cost of 1, but must pay some amount K to enter the market.
Now assume that the incumbent can commit to a quantity prior to the entrance of the entrant. Assume that the entrant will remain out of the market if he is indifferent. Prove that the minimum value of K is ?0.3364?such that the incumbent will choose a quantity that deters entry? In this case, what are its profits?
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