9. When demand and supply change simultaneously, the changes in equilibrium price and equilibrium quantity are not determinate without knowing the relative magnitude of the shocks.

III. A monopoly firm, Firm C, has a constant marginal cost $2. A potential entrant, Firm D, is considering whether to enter into the market. Entry requires a fixed cost $f, with 0 < f < 1/2. By paying f, Firm D can enter into the market and offer the same product as Firm C at a lower (constant) marginal cost $1/2. (Firms have no other cost.) There is only one consumer in the market, who purchases at most one unit of the product. The consumption value of the product is $4. Consider the following game: Firm D first decides whether to spend f to enter into the market. If Firm D does not enter, then Firm C maintains its monopoly and charges the monopoly price; but if Firm D enters, the two firms engage in Bertrand competition and simultaneously offer a price to the consumer, who then makes the purchasing decision. In this part of questions, note that: (i) A consumer does not face any budget constraint. He makes the purchasing decision to maximize consumer surplus; and if he doesn't buy, consumer surplus is zero. (ii) Upon indifference between the offer of the two firms, a consumer will buy from Firm D. (iii) Firm D will enter and make a sale as long as its profit is not strictly negative. 1. _ (3%) In a subgame perfect equilibrium, what is the market price and consumer surplus?

9. When demand and supply change simultaneously, the changes in equilibrium price and equilibrium quantity are not determinate without knowing the relative magnitude of the shocks.

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