Consider an Industry in Which Firms Produce Undifferentiated Product with Differentiated

Short Answer

Consider an industry in which firms produce undifferentiated product with differentiated production costs.AVC and MC are constant up to a capacity of one million units per year.Assume the industry can accommodate many firms producing at capacity and that the industry's most efficient firms can achieve an AVC of $1/unit.There are many potential entrants into this market,but due to imperfect imitation,not all can emulate the low-cost position.Before entering,a competitor believes there is a 25% probability its AVC will take on each of four values: $2,$4,$6,$8.Additionally,suppose the firm will incur the cost of building a factory when entering the industry.Factories cost $30 million to build and (for simplicity)never depreciate in value.If investors expect a return of 10% on their capital and the factory has zero scrap value,what will the equilibrium price be?