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Consider an industry in which firms can expect to sell 1,000 units
annually at a market price of P. Before firms enter, they do not know
their production costs with certainty. Instead, they believe that unit
costs can be $2, $4, $6, or $8 with equal probability. Annualized sunk
production costs are 1,500 – firms cannot recover this expense should
they choose to exit. What is the equilibrium price at which firms are
indifferent about entering? What is the average profit of firms that are
producing? (Hint:Firms will produce as long as the price equals or
exceeds unit production costs.)
