1. Draw a set of reaction functions such that in the Dixit model, the incumbent would install excess capacity and deter entry. What must you assume about the effect of an increase in a rival's output on marginal revenue?
2. (a) What is the equilibrium outcome in the Dixit model if q M > q V ? Why?
(b) Suppose entry is deterred in the Dixit model and ql > q M . Would the incumbent ever expand its capacity in the second stage? In particular, would an incumbent ever produce where MR1(q1, 0) = w?