Suppose that the domestic market for widgets is currently served by firm 1, which has the following cost function: TC(q ) =0

Suppose that the domestic market for widgets is currently served by firm 1, which has the following cost function: TC(q ) =0.025q . Market inverse demand is P =50-0.10, and right now O = q, as the only firm in the market is firm 1. a) If the incumbent acts as a monopolist, what price will it charge and what quantity of output will it produce? b) Suppose now that a foreign producer of widgets, firm 2, is considering exporting to the US market. Because of transportation costs and tariffs this foreign firm faces a cost disadvantage vis-a-vis the domestic incumbent. Specifically, the foreign firm's cost function is TC(q2 ) =10q2 +0.025q, . Suppose that the incumbent firm is committed to the monopoly level of output. What is the inverse demand curve that the potential entrant faces? What quantity of output would firm 2 choose to supply? What would the market price be? c) To what quantity of output would the incumbent firm I have to commit in order to deter the foreign firm 2 from entering the market? What would be the incumbent firm's profit? d) Suppose instead that the incumbent and the entrant will play a Cournot game if and when the entrant enters. Derive the Nash equilibrium, the market price, and the firms' profits. e) Is it reasonable to believe that the incumbent will try and commit to a quantity of output in order to deter entry? Why?