This introduction is relevant for questions 16-20. These questions are about the Dixit Model.

In a market, demand is given byP=150-Q. The firms have a fixed costF₁=0andF₂=F>0. The production of each unit of the good is associated with a capacity costr=30per unit, and an additional cost ofw=30per unit. Recall that in the Dixit model. In period 1, the incumbent (firm 1) is alone and can invest in capacityK, the costrKis sunk. An entrant (firm 2) observesKand then decides to enter or not. If there is entry, the firms engage in simultaneous quantity competition. Entrant's marginal cost isw+r. Incumbent's marginal cost iswifq₁andw+rifq₁>K.

16. What is the monopoly quantity ifP=150-Qand the marginal cost is w+r=60

17. Use the inforamtion in question 16.In a simultaneous quantity competition game, when the entrant has a marginal cost w+r=60,

(i) What is the entrant's best response?

(ii) Take as given that in an asymmetric Cournot equilibrium, if mc₁=30 and mc₂=60, then the equilibrium quantity of firm 1 is q₁=50. Find q₂in this asymmetric Cournot equilibrium.

q₂=30-0.5q₁and q₂=5.

q₂=45-0.5q₁and q₂=20.

q₂=15-0.5q₁and q₂=10.

The correct answer is not listed here.

q₂=40-0.5q₁and q₂=15.

18.Use the infomation in question 16. For what values of F is entry blockaded? Entry is blockaded when F

19.For which of these values of F is entry deterred? What is the entrant's breakeven point (the point where the entrant's profit if he enter would be 0), B?

Entry is deterred for F=441. For this F, B=(48,21).

Entry is deterred for F=700.

Entry is deterred for F=361. For this F, B=(56,17).

Entry is deterred when F=12.

20.Briefly explain your answer to question 19. If you guest the answer correctly, you will get credit for question 19. But to get credit for question 20, you should provide an explanation that shows unertanding of the Dixit model.