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Firm 1 is the incumbent firm and has already incurred all fixed costs, which are sunk....

Firm 1 is the incumbent firm and has already incurred all fixed costs, which are sunk. Firm 2 is a potential entrant that must pay a sunk cost of 5 to enter the market. Assume that both marginal cost and average variable cost equal 10. Assume that the market demand equation in this case is Q = 10 – P/2 and that the two firms would produce the same homogeneous good and compete based on price if the second firm enters the market. Assume further that the incumbent firm is unable to commit to a price if the second firm enters. What will be the equilibrium price and what will the potential entrant do? Explain your reasoning.

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