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Consider a monopoly (firm A) which produces and sells gadgets. The firm has been around for...

Consider a monopoly (firm A) which produces and sells gadgets. The firm has been around for along time, implying it has no fixed cost for the production. The inverse market demand function is: P= 14−Q, wherePis the price of gadgets, Q is total supply. Firm A’s marginal (and average-)cost for producing gadgets is 2.

1. Suppose now that a firm B considers entering the market. If it enters, the two firms decideabout production volumes simultaneously. Firm B has the same marginal cost as firm A but it alsohas a fixed costF= 17to set up a production plant if it decides to enter. Find the equilibriumprice and equilibrium quantities if firm B enters the market. Calculate the profits of firm A andfirm B. Would firm B want to enter the market?

2. Suppose again that firm B considers entering the market but now, if it enters, the produc-tion volumes are not decided simultaneously. Instead firm B has the opportunity to decide firstand Firm A decides its production volume knowing and observing Firm B’s production volume.As in the previous subquestion, firm B has the same marginal cost as firm A but it also has a fixedcostF= 17to set up a production plant if it decides to enter. Find the production volumes thetwo firms will produce in equilibrium. Find the profits of the two firms. What do you concludeabout entry now?

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