Return to Figure 9.2. Suppose P₀ is $10 and P₁ is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce 6,000 units, how much output would the two firms supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?

Figure 9.2

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Cost or Price (S) P₁ 4,000 6,000 8,000 Demand 12,000 16,000 20,000 Output LRAC