Reference no: EM133711297

Question: Let the inverse demand curve be P (Q) = 56!2Q, Q = q1 +q2. Costs for each firm are a constant variable cost of 2 per unit of output, a unit capacity cost of 18, and setup costs of f. One unit of capacity is required to produce one unit of output. In the first period, firm 1 moves and chooses its capacity. In the second stage, after observing firm 1's capacity choice, firm 2 decides whether or not to enter the market. In the third and final stage, active firms compete by setting quantities simultaneously. In the quantity setting subgame, firm 2 chooses its output and capacity simultaneously. Firm 1 can produce up to its installed capacity with only a constant variable cost of 2 per unit of output. Firm 1 also has the option of installing additional capacity at the same cost of 18.