Back in the 70s, IBM was the dominant supplier in the computer industry, but it did face entry threats. We will go back to that time and walk through the possible decisions made by the firm. Suppose that IBM produces q1 and it incurs a cost of c1(q1) = 10 q1. IBM faces potential entry by Fujitsu, the Japanese computer maker. Fujitsu produces a computer that is a perfect substitute for the IBM computer, however its production costs are: c2 (q2) = 100 + 20 q2 where q2 is Fujitsu’s production level. Price and costs are measured in hundreds of thousands of dollars. Assume that inverse demand for computers is given by p(Q) = 200 - Q, (Q = q1 + q2 is the total production by IBM and Fujitsu if both firms produce). Initially suppose that the incumbent, IBM can credibly commit to a quantity to produce, after observing that choice, Fujitsu will choose its own quantity. (Sequential game) a) Find Fujitsu’s reaction function considering that this firm will make its decision after observing the IBM’s choice. b) Assume IBM accommodates entry, find IBM’s profit-maximizing quantity and its resulting profits (we are solving this by using solving induction). This is the Stackelberg model. c) Now assume that IBM produces to limit Fujitsu’s entry. Since they compete in quantities, obtain q1 that results in the limit price (If IBM limit prices it will pick the quantity such that Fujitsu’s profits are zero) d) Will IBM prefer to deter entry or accommodate entry? Explain your answer.