9. scenario #2: suppose you work for the wholesome hamburger company. you own 100 fast food restaurants in california. there is a big drought and people are being told to use less water. you know that it takes: 1,800 gallons of water to produce one pound of beef, 12 gallons of water to produce a head of lettuce, 2 gallons for one walnut, and 468 gallons of water to produce a pound of chicken. you discuss this with the executives in your firm and they tell you that the way water is allocated by government, the company does not incur any additional expense: water will remain very cheap for business. the head of the company is soliciting ideas for its strategic plan for the future. what are the alternatives? what are your recommendations? why do you recommend this course of action? indicate to what extent you agree with the following statements.

1. consider a two-firm industry. firm 1 (the incumbent) chooses a level of output qı. firm 2 (the potential entrant) observes qı and then chooses its level of output q2. the demand for the product is p 100 q, where q is the total output sold by the two firms which equals qi +q2. assume that the marginal cost of each firm is zero. a) find the subgame perfect equilibrium levels of qi and q2 keeping in mind that firm 1 chooses qi first and firm 2 observes qi and chooses its q2. find the profits of the two firms-n1 and t2- in the subgame perfect equilibrium. how do these numbers differ from the cournot equilibrium? b) for what level of qi would firm 2 be deterred from entering? would a rational firm 1 have an incentive to choose this level of qi? which entry condition does this market have: blockaded, deterred, or accommodated? now suppose that firm 2 has to incur a fixed cost of entry, f> 0. c) for what values of f will entry be blockaded? d) find out the entry deterring level of q, denoted by q1', a expression for firm l's profit, when entry is deterred, as a function of f. for what values of f would firm 1 use an entry deterring strategy?