Consider the following problem. Firm 1, the leader, selects and output, q1, after which firm 2,...

 

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Consider the following problem. Firm 1, the leader, selects and output, q1, after which firm 2, the follower, observes the choice of q₁ and then selects its own output, 9₂2. The resulting price is one satisfying the industry demand curve P = 200-9₁-92. Both firms have zero fixed costs and a constant marginal cost of $60. a) Derive the equation for the follower firm's best response function. b) Determine the equilibrium output of each firm in the Stacklberg model. c) Now lets the two firm choose their outputs simultaneously. Compute the Cournot equilibrium outputs and industry price. Consider the following problem. Firm 1, the leader, selects and output, q1, after which firm 2, the follower, observes the choice of q₁ and then selects its own output, 9₂2. The resulting price is one satisfying the industry demand curve P = 200-9₁-92. Both firms have zero fixed costs and a constant marginal cost of $60. a) Derive the equation for the follower firm's best response function. b) Determine the equilibrium output of each firm in the Stacklberg model. c) Now lets the two firm choose their outputs simultaneously. Compute the Cournot equilibrium outputs and industry price.

Answer rating: 100% (QA)

a To derive the follower firms best response function we need to determine the output level that maximizes its profit given the leaders output choice ... View the full answer