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(Solved) 2. Entry II Consider an industry with inverse demand: p(y)=90—y where y denotes industry output. There are two firms: firm 1 is the incumbent...


2. Entry II Consider an industry with inverse demand: p(y)=90—y where y denotes industry output. There are two firms: firm 1 is the incumbent firm and firm 2 is the potential entrant. Firm 1 can adopt one of two technologies. Technology A is labor intensive and is characterized by a cost function: CA (y) = 200 + 30y Technology B is capital intensive, producing goods at zero marginal cost but at a very high fixed cost CB 2 1600. After firm 1 has chosen its technology, firm 2 can consider entering. However, it has only one technology choice, the labor—intensive, technology A. If it enters, the two firms compete in quantities. a. If firm 1 was not threatened by entry, which technology would it choose? b. Suppose firm 1 adopts technology A. Derive the best replies of the two firms in the post—entry game and show that firm 2 will enter. c. Determine the subgame perfect equilibrium.
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