ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC is well established company with an excellent credit rating in the debt market; it can borrow funds either at 8.5% fixed rate of at LIBOR 0.5% floating rate. XYZ Company is a fledgling start-up firm without a strong credit history. It can borrow funds either at 9.5% fixed rate or at LIBOR 2.5% floating rate. There is an opportunity for ABC and XYZ to benefit by means of an interest swap. 9. Suppose they agree to swap their obligations. Specifically, Company ABC will issue debt in the floating rate market (at LIBOR 0.5%), and Company XYZ will issue debt in the fixed rate market (at 9.5%). Then, Company ABC will pay 8% fixed rate to Company XYZ, while receiving LIBOR 0.25% floating rate from Company XYZ. What is the gain to Company ABC from the swap

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?