Suppose that Firm 1 and Firm 2 are Stackelberg competitors in the market for popsicles. Firm 1 is the leader and Firm 2 is the follower. They have the same cost functions such that MC = 4. Market demand for popsicles is given by QD = 38 – 0.5P. Use this information to answer questions #1 and #2. 1. How many popsicles will Firm 1 produce in the SPE of this game? a. 91 6 b. q1 = 9 12 91 d. 91 с. 18 e. 91 = 36 %3D 2. If these firms were Cournot competitors, then compared to the outcome in #1 (Hint: No calculations necessary.) a. Firm 1 would earn more profit, and Firm 2 would earn less profit. b. Firm 1 would earn less profit, and firm 2 would earn more profit. c. Both firms would earn less profit. d. Both firms would earn more profit. The firms' profits would be the same, but industry-wide profit would be lower.

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The theory of absolute advantage was given by Adam Smith in the year 1776.