A monopolist’s demand curve is: P = 400 – 2 Q. His marginal costs are represented by: MCm = ACm = 40.

(a) Solve for the monopolist’s profit-maximizing outp, price, and profits.

(b) Suppose a potential entrant is considering entering, but the monopolist has a cost advantage in that the MC for the potential entrants is: MCe = ACe = 50. Assume that the monopolist continues to maximize his profits, solve for the residual demand curve for the potential entrant.

(c) Suppose the potential entrant follows the Cournot assumption about the monopolist’s output. Solve for the potential entrant’s output, price, and profits in this scenario. What are the new monopoly profits?

(d) Is there a price that the monopolist can charge to deter entry? What is the monopoly profit at this price? Should a rational monopolist go for the entry-deterring price or will it accept the joint profit-maximization in this situation?

16)Suppose a monopolist has a choice of picking from two streams of profits. Stream1 represents his profits if he charges the entry deterring limit price and stream2 represents the profits if he lets the entry happen and adapts to the entry of new firms at different intervals. Assume the market discount rate is 5%/year.

Year: 1 2 3 4 5 6 7 8 9 10

Stream 1: 300 300 300 300 300 300 300 300 300 300

Stream 2: 500 450 400 350 300 250 200 150 100 50

(a) Should he charge the limit price to deter entry or accept the entry? Assume his goal is maximize the PV of long-run profits.

(b) Suppose the market discount rate is 20% instead of 5%. Should he now charge the limit price to deter entry or accept the entry? Assume his goal is maximize the PV of long-run profits.