The demand for product X is P_x = 15 3X 2Y, where Y is the quantity of a substitute product that currently is not being produced. The marginal cost of X is a constant equal to $2. Entry is completely barred and a monopolist, "Incumbent," produces X.

a. Find Incumbent's price, quantity, and prot.

b. Incumbent wishes to investigate the possibility of introducing Y, which is also protected from entry by other rms. The demand for Y is P_y = 15 3Y 2X and it also has a constant marginal cost of $2. However, there is a xed cost of introducing Y of $4. Find the values of X, Y, P_x, P_y, and prot for Incumbent. Will Incumbent introduce Y?

c. Would it be in society's interests to have Incumbent introduce Y?

d. Still assuming that entry is not barred, will Incumbent have an incentive to preempt the entry by Entrant and offer Y rst? (It is assumed that if Incumbent offers Y, then a second seller of Y will have negative prots.)

e. If the xed cost of introducing Y is now taken to be $6, answer parts d and e. Is it in society's interests to have Y introduced?