Ninja Turtles versus Tai Chi Frogs. The demand for fantasy amphibians is linear, with a slope of $0.01 per amphibian. The average cost of production is constant at $3. The demand curve intersects the horizontal average-cost curve at a quantity of 600 amphibians. A firm selling ninja turtles currently has a monopoly, selling 300 turtles at a price of $6. A second firm is considering entering the market with tai chi frogs, and the minimum entry quantity is 100 amphibians. If the turtle firm is passive and lets the frog firm enter, each firm will sell 200 amphibians at a price of $5.
a. Draw a graph like the one shown in Figure 27.9 on page 588 with all the relevant numbers.
b. Draw a game tree like the one shown in Figure 27.10 on page 588 and predict the outcome of the game. How will the turtle firm respond to the threat of entry? Will the frog firm enter the market?
c. How would your response to part (a) change if the minimum entry quantity dropped to 50 amphibians?