Suppose the inverse market demand is given by P = 105 − Q.If the incumbent continues to produce 40 units of output,which of the following equations best summarizes the potential entrant's residual demand curve?
A) P = 65 − 2Q
B) P = 20 − 0.5Q
C) P = 150 − Q
D) P = 65 − Q

Question

Quizplus · Accepted Answer

To find the residual demand curve for the potential entrant, we need to subtract the quantity produced by the incumbent from the total market quantity at each price level.

At a price of P, the total market quantity is given by:

Q_total = 105 - P

Since the incumbent is producing 40 units, the quantity available to the potential entrant is:

Q_potential entrant = Q_total - 40 
Q_potential entrant = (105 - P) - 40 
Q_potential entrant = 65 - P

Now we can express the potential entrant's residual demand curve as:

P = 65 - Q_potential entrant

P = 65 - (65 - P)

P = P

This means that the potential entrant faces a horizontal residual demand curve at the market price level.

Therefore, the best choice is option D, which has a residual demand curve of P = 65 - Q.

Suppose the Inverse Market Demand Is Given by P =