Consider the Dixit capacity investment model when the inverse market demand curve is P(Q) = 200 − Q, w = 20, r = 10, and K = 200. a. Derive a new firm’s post-entry best reply function. b. Given initial capacity of x, derive the incumbent firm’s post-entry best reply function. c. Given x, derive the post-entry equilibrium profit of a new firm. d. Derive the minimum capacity that makes entry unprofitable. e. Derive the optimal capacity choice of the incumbent firm.

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