Question
Consider an industry in which firms can expect to sell 1,000 units annually at a market price of P. Before firms enter, they do not
Consider an industry in which firms can expect to sell 1,000 units annually at a market
price of P. Before firms enter, they do not know their production costs with certainty.
Instead, they believe that unit costs can be $2, $4, $6, or $8 with equal probability.
Annualized sunk production costs are $1,500firms cannot recover this expense
should they choose to exit. What is the equilibrium price at which firms are indifferent
about entering? What is the average profit of firms that are producing? (Hint: Firms
will produce as long as the price equals or exceeds unit production costs.)Besanko, Dranove, Shanley & Schaefer
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