A potential entrant knows that it faces a (inverse) residual demand curve given by P = 90 - 3Q. While the entrant does not know the inverse market demand, it does know that the incumbent committed to producing 10 units. Using this information, which of the following equations best summarizes the inverse market demand curve?
A) P = 60 - 3Q
B) P = 80 - 3Q
C) P = 50 - 3Q
D) None of the statements is correct.

Question

Quizplus · Accepted Answer

The inverse market demand curve is P = 90 - 3Q. The incumbent committed to producing 10 units, so the residual demand curve faced by the potential entrant is P = 90 - 3Q - 3(10) = 60 - 3Q.

A Potential Entrant Knows That It Faces a (Inverse) Residual