92) = 275-9₁ −92 and each firm has a marginal cost of $35 per unit. A ut of the market et, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Ca 's profits in this equilibrium. (Enter your responses rounded to two decir 60.00
92) = 275-9₁ −92 and each firm has a marginal cost of $35 per unit. A ut of the market et, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Ca 's profits in this equilibrium. (Enter your responses rounded to two decir 60.00
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter12: Price And Output Determination: Oligopoly
Section: Chapter Questions
Problem 2E
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Answer is in the photo, please provide a solution
![Consider a duopoly in which two identical firms compete by setting their quantities but Firm 1 has first mover advantage (i.e.,
Firm 1 is the Stackelberg Leader). We want to consider whether Firm 1 should use its advantage to drive Firm 2 out of the market.
Suppose the inverse market demand is P (9₁,92) = 275-9₁-92 and each firm has a marginal cost of $35 per unit. Also assume that fixed
costs are negligible.
Strategy #1: Firm 1 does not drive Firm 2 out of the market
If Firm 1 does not drive Firm 2 out of the market, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Calculate the equilibrium
when Firm 1 moves first and determine Firm 1's profits in this equilibrium. (Enter your responses rounded to two decimal places.)
Equilibrium quantities: q₁
=
Equilibrium price: P = $95.00.
Firm 1's profits: ₁ =
$7200.00.
120.00 and q₂ = 60.00.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8eca2489-107c-4d95-94fa-fd63fce61336%2F9b75c408-b5e9-4564-ac36-a649741ec2cf%2F0oxhfil_processed.png&w=3840&q=75)
Transcribed Image Text:Consider a duopoly in which two identical firms compete by setting their quantities but Firm 1 has first mover advantage (i.e.,
Firm 1 is the Stackelberg Leader). We want to consider whether Firm 1 should use its advantage to drive Firm 2 out of the market.
Suppose the inverse market demand is P (9₁,92) = 275-9₁-92 and each firm has a marginal cost of $35 per unit. Also assume that fixed
costs are negligible.
Strategy #1: Firm 1 does not drive Firm 2 out of the market
If Firm 1 does not drive Firm 2 out of the market, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Calculate the equilibrium
when Firm 1 moves first and determine Firm 1's profits in this equilibrium. (Enter your responses rounded to two decimal places.)
Equilibrium quantities: q₁
=
Equilibrium price: P = $95.00.
Firm 1's profits: ₁ =
$7200.00.
120.00 and q₂ = 60.00.
![Strategy #2: Firm 1 drives Firm 2 out of the market
Consider an alternative strategy where Firm 1 produces a quantity that results in Firm 2 producing nothing. Calculate the minimum quantity
that Firm 1 would have to produce to drive Firm 2 out of the market, the resulting market price, and Firm 1's profits.
Firm 1's quantity: 9₁
= 240.00 units. (Enter your response rounded to two decimal places.)
Equilibrium price: P = 35.00. (Enter your response rounded to two decimal places.)
Firm 1's profits: ₁ = $0.00.
Firm 1 would need to continue producing at the higher level you found under Strategy #2 to keep Firm 2 out of the market. Comparing Firm 1's
profits under the strategies, what is the optimal strategy for Firm 1, the Stackelberg leader, to use?
A. Strategy 1
B. Strategy 2](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8eca2489-107c-4d95-94fa-fd63fce61336%2F9b75c408-b5e9-4564-ac36-a649741ec2cf%2F1jz5zxd.png&w=3840&q=75)
Transcribed Image Text:Strategy #2: Firm 1 drives Firm 2 out of the market
Consider an alternative strategy where Firm 1 produces a quantity that results in Firm 2 producing nothing. Calculate the minimum quantity
that Firm 1 would have to produce to drive Firm 2 out of the market, the resulting market price, and Firm 1's profits.
Firm 1's quantity: 9₁
= 240.00 units. (Enter your response rounded to two decimal places.)
Equilibrium price: P = 35.00. (Enter your response rounded to two decimal places.)
Firm 1's profits: ₁ = $0.00.
Firm 1 would need to continue producing at the higher level you found under Strategy #2 to keep Firm 2 out of the market. Comparing Firm 1's
profits under the strategies, what is the optimal strategy for Firm 1, the Stackelberg leader, to use?
A. Strategy 1
B. Strategy 2
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