Etak, who dominates the world of surfboard production, has historically earned large profits as a result of her monopoly power. In the absence of competition, Etak earns profits of $20. New to the world of waves is Lien, who is thinking about starting up his own surfboard production company. If Lien decides to enter and Etak accommodates by maintaining price and sharing the market, Etak will earn a profit of $10 and Lien will earn $8. If Lien decides to enter and Etak chooses to fight, then Etak must invest in additional production capacity in order to flood the market with inexpensive products. In this case, Etak will earn $5 and Lien will earn -$2. Etak now considers building the additional production capacity before Lien makes his entry decision. The investment in additional capacity will reduce Etak's profits by $6 in all situations except for the case when Lien enters and Etak chooses to fight (i.e., profits for Etak when Fight is chosen do not depend on whether the additional capacity required for the fight is installed before or after Lien's entry decision). a) Suppose that Etak hears a rumor that Lien is rather "crazy. Lien will always enter the market when it is profitable for him to do so but with probability p, he will also enter when it is not profitable for him to enter. For what values of p will Etak choose to invest in the additional capacity before Lien's entry decision?|| Etak, who dominates the world of surfboard production, has historically earned large profits as a result of her monopoly power. In the absence of competition, Etak earns profits of $20. New to the world of waves is Lien, who is thinking about starting up his own surfboard production company. If Lien decides to enter and Etak accommodates by maintaining price and sharing the market, Etak will earn a profit of $10 and Lien will earn $8. If Lien decides to enter and Etak chooses to fight, then Etak must invest in additional production capacity in order to flood the market with inexpensive products. In this case, Etak will earn $5 and Lien will earn -$2. Etak now considers building the additional production capacity before Lien makes his entry decision. The investment in additional capacity will reduce Etak's profits by $6 in all situations except for the case when Lien enters and Etak chooses to fight (i.e., profits for Etak when Fight is chosen do not depend on whether the additional capacity required for the fight is installed before or after Lien's entry decision). a) Suppose that Etak hears a rumor that Lien is rather "crazy. Lien will always enter the market when it is profitable for him to do so but with probability p, he will also enter when it is not profitable for him to enter. For what values of p will Etak choose to invest in the additional capacity before Lien's entry decision?||
