Purchase Solution

# cost function

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3. You are a potential entrant into a market that previously has had entry blocked by the government. Your market research has estimated that the market demand curve for this industry is

P = 22,500 - 75Q,

where

You estimate that if you enter the market, your own cost function will be

Cy(Qy) = 50,000 + 3,000Qy.

The government has invited your firm to enter the industry, but it will require you to pay a one-time license fee of \$100,000. You do not know the cost functions of the firms presently in the market; however, the price is now \$16,000. Last year 87 units were sold by existing firms. Would you choose to enter this market? Explain.

##### Solution Summary

Determine cost function

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You are a potential entrant to the market. You have to make the decision: do I enter the market or do I not enter the market?
<br>As you are rational you will enter the market only if you can make a positive profit.
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<br>If you enter the market you will have to decide at what price you want to sell at. You look at the market and find that the current market price is \$16,000. If you price your product higher than \$16,000, then no one will buy from you. If you price at exactly \$16,000 then people may or may not buy from you. ...

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