Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 6

A potential entrant can produce at the same cost as the monopolist illustrated in the figure on the next page. The monopolist's demand curve is given by D M , and its average cost curve is AC.
a. What level of output does the monopolist have to produce in order for the entrant to face the residual demand curve, D R ?

b. How much profit will the monopolist earn if it commits to the output that generates the residual demand curve, D R ?
c. Can the monopolist profitably deter entry by committing to a different level of output? Explain.