The inverse market demand for fax paper is given by P=100-Q. There are two firms who produce fax paper. Firm 1 has a cost of production of C1= 15*Q1 and firm 2 has a cost of production of C2=20*Q2 a) Suppose that firm play a Stackelberg game. First firm 1 sets the quantity in t=1, then, knowing which quantity firm 1 has set, firm 2 chooses the quantity in t=2. What are the Stackelberg quantities and prices? What are the profits od firm 1 and 2? Compared to part a) which firm benefits and which firm loses?
The inverse market
a) Suppose that firm play a Stackelberg game. First firm 1 sets the quantity in t=1, then, knowing which quantity
firm 1 has set, firm 2 chooses the quantity in t=2. What are the Stackelberg quantities and prices? What are
the profits od firm 1 and 2? Compared to part a) which firm benefits and which firm loses?
To analyze the Stackelberg competition between Firm 1 and Firm 2, let's proceed step-by-step:
Backward Induction: In a Stackelberg game, we start by looking at the decisions of the firm that moves last, which is Firm 2 in this case. Firm 2 chooses its quantity Q2 after observing the choice of Q1 by firm 1.
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