Problem 6.1. Consider a Stackleberg game of quality competition between two firms. Firm 1 is the leader and firm 2 is the follower. Market demand is described by the inverse demand function P = 1000 - 4Q. Each firm has a constant unit cost of production equal to 20. Please write answers in the boxes provided, showing work in blank areas. (a) The reaction function for firm 2 (follower) is: 92 (91) (b) The demand curve for firm 1 if firm 2 follows its best response is: 9₁ = (c) Optimal output q for each firm. 91 = P = = (d) Market price (from demand curve). (e) Firm profits. π₁ = 92 = C₂ = π2 = (f) Suppose firm 2 has a marginal cost less than firm 1's cost, so c₂ < 20. At what value of c2 would the two firms (leader and ower) have the same market share? Hint: to solve, write firm 2's best response as a function of q₁ and c2, then firm 1's demand and MR as a function of c₂.

Problem 6.1. Consider a Stackleberg game of quality competition between two firms. Firm 1 is the leader and firm 2 is the follower. Market demand is described by the inverse demand function P = 1000 - 4Q. Each firm has a constant unit cost of production equal to 20. Please write answers in the boxes provided, showing work in blank areas. (a) The reaction function for firm 2 (follower) is: 92 (91) (b) The demand curve for firm 1 if firm 2 follows its best response is: 9₁ = (c) Optimal output q for each firm. 91 = P = = (d) Market price (from demand curve). (e) Firm profits. π₁ = 92 = C₂ = π2 = (f) Suppose firm 2 has a marginal cost less than firm 1's cost, so c₂ < 20. At what value of c2 would the two firms (leader and ower) have the same market share? Hint: to solve, write firm 2's best response as a function of q₁ and c2, then firm 1's demand and MR as a function of c₂.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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