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A monopolist has the following cost function: C(q) = 800 + 8q + 6^q2

It faces the following demand from consumers: P= 200 – 2Q. There is another firm, with the same cost function, that may consider entering the industry. If it does, equilibrium price will be determined according to Cournot competition.

(a) How much should the monopolist optimally produce in order to deter entry by the potential entrant?

(b) How much would the monopolist produce if there were no threat of entry?

(c) Compared to a situation of a monopoly with no threat of entry, how much better off are consumers when there is the potential for entry, even if it does not actually occur?

KM
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