Suppose the inverse market demand is given by P = 75 − 0.5Q.If the incumbent continues to produce 20 units of output,which of the following equations best summarizes the potential entrant's residual demand curve?
A) P = 65 − 2Q
B) P = 20 − 0.5Q
C) P = 150 − 2Q
D) P = 65 − 0.5Q

Question

Quizplus · Accepted Answer

To find the residual demand curve faced by the potential entrant, we need to subtract the quantity produced by the incumbent from the total market demand and then solve for P in terms of Q. 
Total market demand: P = 75 - 0.5Q 
Quantity produced by the incumbent: Q1 = 20 
Residual demand curve: P = 75 - 0.5Q1 - 0.5Q2, where Q2 is the output of the potential entrant. 
Substituting Q1 = 20 and rearranging, we get: 
P = 75 - 0.5Q2 - 10 
P = 65 - 0.5Q2 
So the correct answer is D.

Suppose the Inverse Market Demand Is Given by P =