Given the demand and cost conditions of Question 5.1, suppose that the legal intervention imposed by the government leaves the marginal cost unchanged but imposes a fixed cost. What is the minimal fixed cost that will prevent entry?

Question 5.1

An incumbent firm, Firm 1, faces a potential entrant, Firm 2, that has a lower marginal cost. The market inverse demand function is p = 120 - q₁ - q₂. Firm 1 has a constant marginal cost of $20, while Firm 2’s is $10, and they have no fixed costs.