In the Stackelberg model, suppose the first-mover has MR = 15 - Q₁, the second firm has reaction function Q₂ = 15 - Q₁/2, and production occurs at zero marginal cost. Why doesn't the first-mover announce that its production is Q₁ = 30 in order to exclude the second firm from the market (i.e., Q₂ = 0 in this case)? A) In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity. B) In this case, MR is negative and is less than MC, so the first-mover would be producing too much output. C) This is a possible outcome from the Stackelberg duopoly under these conditions. D) We do not have enough information to determine if this is an optimal outcome for this case.

Question

Quizplus · Accepted Answer

If the first-mover sets Q₁ = 30, the marginal revenue (MR) becomes negative, which means the firm would be producing too much output, leading to losses since MR < MC (which is zero).

In the Stackelberg Model, Suppose the First-Mover Has MR =