3. Widgets Entry-deterrence is a common game theory application of firm behavior in oligopoly markets. Xavier Industries is the sole producer of widgets. However, they are currently being threatened by Achilles Industries - a potential entrant. Consider the following information about Xavier Industries (w/small factory): Profits if no entry: $10,000 Profits if entry & price war: $2,000 Profits if entry & no price war: $4,000 Consider the following information about Achilles Industries: Profits if no entry: Profits if entry & price war: -$3,000 Profits if entry & no price war: $2,000 a. What would be Xavier's best response if Achilles Industries actually does enter the market for widgets? (start price war, accommodate entry or indifferent) b. Use backwards inductions, what will Achilles Industries do? (Enter, not enter market, or indifferent) Now, consider that Xavier is able to gain a first mover advantage by building a large factory initially which makes it more cost-efficient to enter a price war - although it does lower overall profits for Xavier Industries. Consider the following information about Xavier Industries (w/large factory): Profits if no entry: $5,000 Profits if entry & price war: $3,000 Profits if entry & no price war: $2,000 Consider the following information about Achilles Industries: Profits if no entry: $0 Profits if entry & price war: -$4,000 Profits if entry & no price war: $1,000 c. Being able to use backwards inductions, what will Achilles Industries do now that Xavier has the large factory? (Enter, not enter market, or indifferent) d. Considering the choice of building a small or large factory - what is Xavier Industries dominant strategy? (four possible options given below) - Build large factory and if entry engage in price war - Build large factory and if entry accommodate entry - Build small factory and if entry engage in price war - Build small factory and if entry accommodate entry