An incumbent firm, Firm 1, faces a potential entrant, Firm 2, with a lower margi

Question

An incumbent firm, Firm 1, faces a potential entrant, Firm 2, with a lower marginal cost. The market demand curve is p 100-41-92 Firm 1 has a constant marginalcost of 540 per unit, while Firm 2's is $10. To block entry, the incumbent appeals to the government to require that the entrant incur extra costs. Suppose that the legal intervention imposed by the government leaves the marginal cost alone (at S10 for Firm 2) but imposes a fixed cost. What is the minimal fixed cost that will prevent entry? The minimum fixed cost (F) that will deter entry is

Explanation / Answer

In case the incumbent is sucessful in drtering entry he will behave as monopolist and will serve whole market .

At equilibirum

MR= MC

100- 2Q = 40

60 = 2Q

Q= 30

P= 100-30= 70

PROFIT = 70*30- 40*30

               = 2100- 1200

                = 900

so maximam firm 1 is willin to pay is 900 to deter entry.

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