Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The inducement to entry is:
A)225.
B)275.
C)250.
D)200.

Question

Quizplus · Accepted Answer

The inducement to entry is the difference between the profit a monopolist would earn and the profit a duopolist would earn. In this case, the monopolist's profit is given by:πm = (p - mc) * y= (100 - 40) * y= 60yThe duopolist's profit is given by:πd = (p - mc) * y/2= (100 - 40) * y/2= 30yTherefore, the inducement to entry is:πm - πd = 60y - 30y = 30y = 225

Suppose the Demand Function in the Industry Is P =