Market demand is Q=a-bp. The total cost of the single incumbent is mqI.

(a) Initially there is no entry threat, so the incumbent produces the monopoly output. Find this output.

(b) A potential entrant appears with cost cqE (no fixed cost) where c > m. The incumbent chooses its output (capacity) first. The entrant observes the incumbents choice and then makes its own output choice (Stackelberg output leader/follower equilibrium). Relative to its output when there is no entry threat, does the incumbent produce more or less when entry is possible?

(c) If the incumbent could postpone choosing its output till the entrant also has to choose, would it want to do so?