Problem
1. Explain why there is a greater incentive to innovate if the final stage of competition is with a small number of quantity-setting firms rather than price-setting firms.
2. Why might a merger lead to a price reduction? Why might a merger lead to a price increase?
3. Suppose that a firm (the incumbent) produces with constant marginal cost at $10 and has a constant (minus) elasticity of demand of 2. What is its profit-maximizing price? Now suppose that a new firm enters the market. The demand curve facing the incumbent firm shifts inward, but suppose that the elasticity of demand does not change. Should the incumbent firm change its price? What happens to the quantity that it sells? Draw a diagram to illustrate this market.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.