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In the Stackelberg model we saw in class there were two firms 1 and 2. Suppose...

In the Stackelberg model we saw in class there were two firms 1 and 2. Suppose that the market demand is p(Q) = 60−Q, where as in class Q is the aggregate quantity. The const function for firm 1 is c1(q1) = 10q1 and the cost function for firm 2 is c2(q2) = q2. Firm 1 is the leader and Firm 2 is the follower.

(a) Solve for the follow’s reaction function, and the leader’s maximization problem.

(b) Describe the Stackelberg equilibrium and solve for the Stackelberg equilibrium outcome. Compute each firm’s profit.

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Answer #1

follower, firm 2, 80 Q) | P(Q) = 60-0, Q = 9+92, MG=10, MG=1. a) To = (P-MC2) 92 T2 = (60-9-92-1) 92 T2 = (59.69 (59-W9292 Fo

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