-The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.The potential entrant cannot earn a profit if the incumbent
A) chooses the Cournot level of output.
B) chooses the Stackelberg leader level of output.
C) shuts down.
D) deters entry.

Question

-The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.The potential entrant cannot earn a profit if the incumbent
A) chooses the Cournot level of output. 
B) chooses the Stackelberg leader level of output. 
C) shuts down. 
D) deters entry.

Quizplus · Accepted Answer

The correct answer is D) deters entry. This is because when an incumbent firm takes specific actions to deter entry, such as setting prices low enough or producing at a scale that a new entrant cannot compete with, it can effectively prevent the potential entrant from earning a profit. This strategy can involve various tactics, including but not limited to, producing at a level that saturates the market or using pricing strategies that make entry unattractive or unprofitable for newcomers.

-The Above Figure Shows the Payoff Matrix Facing an Incumbent