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2. Firm A is a Stackleberg leader and firm Bis a Stackleberg follower Demand: Marginal Cost: P-100-29.-24 MC=10 9,= 20-4 Firm
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Answer #1

a) Profit is given by πA = revenue - cost

πA = (100 - 2qA - 2qB)qA - 10qA

= 90qA - 2qA^2 - 2qAqB

Use the best response function of B

πA = 90qA - 2qA^2 - 2qA(20 - 0.5qA)

= 50qA - qA^2

b) Profit is maximum when π'(qA) = 0

50 - 2qA = 0

qA = 25 units and qB = 20 - 0.5*25 = 7.5 units

Market price P = 100 - 2*25 - 2*7.5 = $35 per unit

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