Assume the same market demand and cost functions as Problem 1, the two firms are duopoly but Firm...
Question:
Assume the same market demand and cost functions as Problem 1, the two firms are duopoly but Firm 1 enters the market first and sets its output first, firm 2 determines its output decisions after Firm 1. In this case, Firm 1 is the Stackelberg leader and the two firms make their output decisions independently.
The market demand function is {eq}P = 50 - Q {/eq};
Firm's total costs are {eq}TC_1 = 10q_1 \\ TC_2 = 10q_2 {/eq}
where {eq}Q = q_1 + q_2 {/eq}
1. Solve for Firm 1's profit maximizing output decision?
2. Solve for Firm 2's profit maximizing output decision?
3. What is Firm 1's profit? Firm 2's profit? Total profit?
Reaction Functions:
Reaction functions are schedules that tells a firm exactly how to response to a competitors decisions. For example, If Firm B does a, produce x units of the good, if Firm B does b, then do y.
Answer and Explanation: 1
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View this answerWe start by calculating the followers reaction function, which is solved by maximizing firm 2's profit function.
{eq}\pi_{2}=q_{2}P-TC =...
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