15.7 Assume as in Problem 15.1 that two firms with no production costs, facing demand Q ¼ 150 $ P, choose quantities q1 and q2.

a. Compute the subgame-perfect equilibrium of the Stackelberg version of the game in which firm 1 chooses q1 first and then firm 2 chooses q2.

b. Now add an entry stage after firm 1 chooses q1. In this stage, firm 2 decides whether to enter. If it enters, then it must sink cost K2, after which it is allowed to choose q2. Compute the threshold value of K2 above which firm 1 prefers to deter firm 2’s entry.

c. Represent the Cournot, Stackelberg, and entry-deterrence outcomes on a best-response function diagram.