Firm 1 is already existing in the market. This is called an incumbent

Firm. Now one Firm morning it faces a potential entrant, Firm 2, with a lower

marginal cost. The market demand curve is p(q) = 120 - q1 - q2. Firm 1 has a

constant marginal cost of $20; while Firm 2s is $10:

(a) What are the Cournot equilibrium price, quantities, and profits if there

is no government intervention?

(b) To block entry, the incumbent appeals to the government to require that

the entrant incur extra costs. What happens to the Cournot equilibrium (price,

quantities and profits) if the legal requirement causes the marginal cost of the

second Firm to rise to that of the first Firm, $20?

(c) Now suppose that the barrier leaves the marginal cost unchanged but

imposes a fixed cost. What is the minimal fixed cost that will prevent entry?