Problem
An incumbent firm, Firm 1, faces a potential entrant, Firm 2, with a lower marginal cost. The market demand curve is Firm 1 has a constant marginal cost of $20, while Firm 2's is $10.
a. What are the Cournot equilibrium price, quantities, and profits if there is no government intervention?
b. To block entry, the incumbent appeals to the government to require that the entrant incur extra costs. What happens to the Cournot equilibrium if the legal requirement causes the marginal cost of the second firm to rise to that of the first firm, $20?
c. Now suppose that the barrier leaves the marginal cost alone but imposes a fixed cost. What is the minimal fixed cost that will prevent entry?
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.