Answer to Question #281553 in Microeconomics for William

Question

(Stackelberg model) In a duopoly industry, there are only two firms, firm 1 is the industry leader, while firm 2 is the follower.

Firm 1’s cost function is: C₁=1.2q²₁+2,

firm 2’s cost function is: C₂=1.5q²₂+8.

The market demand function is:P=100-Y .

In a typical Stackelberg model setting, firm 1 makes its production decision first, then firm 2 makes its own decision.

1. Given any q₁ , what is firm 2’s best response/rection function?
2. Given firm 2’s best response function, what is firm 1’s best production decision?
3. What is the Stackelberg equilibrium?

Answer 1

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