Able Widget Co. is the only producer of widgets, which it can produce at a cost of $2 per widget. The demand for widgets is w=14−p
where p is the price of widgets.
(a) How many widgets would Able produce, what would be the price, and how much profit would Able make, if it maximized its profit?
(b) Now suppose Baker Widget Co. can enter the widget market by spending $4 in entry cost. Once it enters, Baker would also be able to produce widgets at a cost of $2 per widget, and Able and Baker would engage in Cournot (quantity-setting) competition. How much would each firm produce, what would be the price, and how much profit would each firm make in the Cournot equilibrium?
(c) Suppose, before Baker entered, Able could pre-commit to producing any output level. What output level would it select if it wished to maximize its profit? How much would each firm produce, what would be the price and how much profit would each firm make in this scenario?