Homework Answers
The leader should set price equals to its MC.
The MC for rival depends on the quantity produced by him he will also set its price at 4, this will happen when he produces 6.32 units of the good and at price 4 the total demand is 960 units. So, the firm will be able to get a much higher share of the market at this price and the rival cannot increase the quantity as this will also increase its MC, and result in an overall loss. The rival will never set its price less than 4 because he will be worse off in that case by selling lesser quantity.
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