Consider the following information: Inverse market demand: P = 12

Question

Consider the following information: Inverse market demand: P = 12 - 0.5(q₁ + q₂) , where q₁ and q₂ are Firm 1's and Firm 2's output
Firm 1's reaction function: q₁ = 9 - 0.5q₂
Firm 2's reaction function: q₂ = 9 - 0.5q₁
The marginal cost of production for both firms is constant at $3. The equilibrium prices in Cournot and Stackelberg competition are _____ and _____, respectively.

Quizplus · Accepted Answer

In Cournot competition, solving the reaction functions gives q1 = q2 = 6, leading to P = 12 - 0.5(6+6) = $6. In Stackelberg competition, the leader's output is higher, resulting in q1 = 8, q2 = 5, leading to P = 12 - 0.5(8+5) = $5.25.