Each firm in a duopoly can produce any positive quantity of output by paying only a fixed cost of f. Let qi denote the output of firm i, and let Q denote the total output. The inverse demand function for the market is p = 10 - Q. (a) Find firm 2's best response function. (b) Suppose that the firms interact as in the Stackelberg model with firm 1 choosing its quantity and then firm 2 choosing its quantity (after observing firm 1's choice). Assume that f = 9. Find the equilibrium quantities and profits.

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Each firm in a duopoly can produce any positive quantity of output by paying only a fixed cost of
f. Let qi denote the output of firm i, and let Q denote the total output. The inverse demand
function for the market is p = 10 - Q.
(a) Find firm 2's best response function.
(b) Suppose that the firms interact as in the Stackelberg model with firm 1 choosing its quantity
and then firm 2 choosing its quantity (after observing firm 1's choice). Assume that f = 9. Find the
equilibrium quantities and profits.
Transcribed Image Text:Each firm in a duopoly can produce any positive quantity of output by paying only a fixed cost of f. Let qi denote the output of firm i, and let Q denote the total output. The inverse demand function for the market is p = 10 - Q. (a) Find firm 2's best response function. (b) Suppose that the firms interact as in the Stackelberg model with firm 1 choosing its quantity and then firm 2 choosing its quantity (after observing firm 1's choice). Assume that f = 9. Find the equilibrium quantities and profits.
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