1. An incumbent, firm 1 , faces a potential entrant and can pre-purchase capacity in an attempt to deter entry. The entrant, firm 2, observes the amount of capacity chosen by firm 1 before its entry decision. Each firm needs a unit of capacity to produce a unit of output, and capacity costs 1 per unit. Market demand is p=5Q, where p is price, and Q is market quantity. Let k denote the amount of capacity that firm 1 purchases prior to firm 2's entry decision. Any post-entry competition is standard Cournot competition. a) Suppose that firm 1 purchases no capacity in the initial period. Compute the resulting equilibrium quantities and profits in the post-entry period given that firm 2 has entered. Show this equilibrium on a graph. b) Suppose that firm 1 has purchased 3 units of capacity in the initial period. Compute the resulting equilibrium quantities and profits in the post-entry period given that firm 2 has entered. Show this equilibrium on a graph. 1. An incumbent, firm 1 , faces a potential entrant and can pre-purchase capacity in an attempt to deter entry. The entrant, firm 2, observes the amount of capacity chosen by firm 1 before its entry decision. Each firm needs a unit of capacity to produce a unit of output, and capacity costs 1 per unit. Market demand is p=5Q, where p is price, and Q is market quantity. Let k denote the amount of capacity that firm 1 purchases prior to firm 2's entry decision. Any post-entry competition is standard Cournot competition. a) Suppose that firm 1 purchases no capacity in the initial period. Compute the resulting equilibrium quantities and profits in the post-entry period given that firm 2 has entered. Show this equilibrium on a graph. b) Suppose that firm 1 has purchased 3 units of capacity in the initial period. Compute the resulting equilibrium quantities and profits in the post-entry period given that firm 2 has entered. Show this equilibrium on a graph