Firm a is a new producer in the market for good x, which is characterized by linear demand and supply curves. initially, to attract customers, the firm prices its product low at $8 per unit. while the firm sells 1,000 units of the product at this price, there is a shortage in the market. this shortage can be cleared if price is increased to $10 per unit. the quantity demanded and supplied at this higher price will be 1,500 units. dan taylor, the firm's financial head, thinks that consumer surplus will certainly decline if the price is increased to $10 because consumers prefer to pay lower prices. which of the following is a flaw in dan's reasoning?
a. he is confusing producer surplus with consumer surplus.
b. he is ignoring the higher cost of advertising associated with a new product in the market.
c. he is assuming that competing firms have increased the prices of their goods.
d. he is confusing consumer surplus with total revenue.
e. he is not accounting for the new consumers who will benefit from being able to consume the product.

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?