This exercise is a continuation of Exercise 3. We return to two firms with the same constant average and marginal cost, AC  MC  5, facing the market demand curve Q1  Q2  53  P. Now we will use the Stackelberg model to analyze what will happen if one of the firms makes its output decision before the other.
a. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2). Find the reaction curves that tell each firm how much to produce in terms of the output of its competitor.
b. How much will each firm produce, and what will its profit be?