Given the success of his Dallas establishment, Dr. Diamond is considering whether to expand his operations and open a second Diamond Steak Palace on the Las Vegas Strip. Naturally, Salt Bae, who pioneered the concept of selling over-the-top steaks to big-spenders already has a branch of his famous Nusr-et Steakhouse on the Strip. Dr. Diamond and Mr. Bae have engaged in extensive market research and have determined that the inverse demand curve for over-the-top steaks in Las Vegas is given by P = 1,900 .05Q. Both restaurants have a marginal cost of $100 per steak and would compete on quantity. Naturally, if he were to choose to enter the Vegas market, Dr. Diamond would spare on expense in designing his new steakhouse, and would incur a fixed cost of entry of $4,000,000.

a. Prior to learning about Dr. Diamonds potential entry, Salt Bae enjoyed a monopoly in the Vegas over-the-top steak market. What were his output and profits, and what was the market price for an over-the-top steak when he was the only player in the Vegas over-top-steak game?

b. Dr. Diamond is considering his options. If Dr. Diamond were to enter the market, he knows that Salt Bae would enjoy a first-mover advantage. That is, Salt Bae would choose his output first, and then Dr. Diamond will choose his output taking Mr. Baes output as given a la Stackelberg. What would Salt Baes and Dr. Diamonds output and profits be, and what would the market price for an over-the-top steak be under this scenario?

c. Show that if Salt Bae were to set his output at 18,200, then it would be unprofitable for Dr. Diamond to enter the market. Given an output of 18,200, what profits would Salt Bae earn, and what would the price of a gold-crusted steak be?

d. What is the minimum output Qd that Salt Bae would need to set to make it unprofitable for Dr. Diamond to enter the market? We refer to the output level Qd as the entry deterrent output

e. Now assume that Salt Bae were to continue to set the monopoly output despite Dr. Diamonds potential entry into the market. Could Dr. Diamond earn a profit in the market?

f. Given the answers to b-e, what output should Salt Bae set? Would you characterize Dr. Diamonds entry in the Vegas over-the-top steak game as accommodated, deterred or blockaded? Explain your answer