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The demand curve for luminous socks is given by: Q = 50 – 0.5P And the total cost function for any firm in the industry is: C = 4Qi' (i) Assume Stackleberg behavior with firm 1 as the leader and firm 2 as the follower. (i) Determine equilibrium outputs (7 marks) (ii) Price (1 mark) (iii) Profit levels for the two firms. (2 marks) (k) Indicate the Cournot, Stackleberg, collusive and competitive outcomes on the market diagram. (5 marks) (l) Calculate the change in consumer surplus when the industry moves from Cournot to Stackleberg equilibrium. What is the value of the deadweight loss in Stackleberg equilibrium? Show that the combined consumer and producer surplus in the Stackleberg equilibrium is less than the surplus to consumers with a competitive solution. (6 marks) (m) Can leadership in the Stackleberg model of duopoly ever produce lower profit than the equilibrium profit level of a duopolist in the Cournot model? Explain. ? (4 marks)
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