Suppose there are two firms in the market, a leader and a follower. Both have the...

 

Transcribed Image Text:

Suppose there are two firms in the market, a leader and a follower. Both have the same cost function: C(q) = C(q) = q and they face the following individual demands: qL(PL,Pf)=3-PL - (PL-Pf), 1 af (PL,pf) = 3-Pf-(Pƒ - PL). Hint: I highly recommend using a calculator. a) (4 points) Describe the follower's profit maximization problem. Derive the best response function. b) (16 points) Describe the leader's profit maximization problem. Derive the equilibrium prices, quantities, and profits. Suppose there are two firms in the market, a leader and a follower. Both have the same cost function: C(q) = C(q) = q and they face the following individual demands: qL(PL,Pf)=3-PL - (PL-Pf), 1 af (PL,pf) = 3-Pf-(Pƒ - PL). Hint: I highly recommend using a calculator. a) (4 points) Describe the follower's profit maximization problem. Derive the best response function. b) (16 points) Describe the leader's profit maximization problem. Derive the equilibrium prices, quantities, and profits.

Answer rating: 100% (QA)

a The followers problem is to maximize profit given the leaders price f pf ... View the full answer