Economics of Business Management - Nash-Equilibrium - Economics Assignment Help

Assignment Task:

Consider a market where P (Q) = 20 – Q and where the incumbent (IN) firm has a constant marginal cost equal to 5 and a fixed cost equal to 20. 

(a) Suppose a new firm (NE) with the same costs as the incumbent enters the market and that the firms engage in quantity competition. Calculate the two firms’ reaction functions and solve for the Nash-equilibrium quantities, price and profits. 

(b) Is it true or false that in this type of competition when one firm increases its production the other backs down? Is this an example of competition in strategic substitutes or strategic complements behaviour? Why?

(c)  Suppose the incumbent (IN) firm could make a sunk investment in a low-cost technology, reducing its marginal cost to 2, before entry occurs. The investment cost is 30. Calculate the equilibrium given that the new entrant (NE) comes in. Is entry profitable for the entrant in this case? Would the (IN) invest?

(d)   Suppose the investment deters entry. Calculate whether it would be Profitable for the incumbent (IN) to make the investment even if there was no risk of entry in the first place.

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