1. Two undifferentiated firms are considering entering a market for a product that has market demand D(p) = 10 - p. Each firm must pay a fixed cost of 5 to enter and has zero marginal cost. Firms simultaneously decide whether to enter, and if they do enter, they price as a monopolist if there is only one firm in the market and as Bertrand duopolists if there are two firms in the market.
2. (10 pts) In a pure strategy equilibrium to the entry game, how many firms enter and what is the equilibrium price?
3. (10 pts) If the government could regulate price and could choose to subsidize either one or two entrants, what would be the socially optimal tax and subsidy policy?