Consider the following information:
Inverse market demand: P = 12 - 0.5(q₁ + q₂) , where q₁ and q₂ are Firm 1 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.

Question

Quizplus · Accepted Answer

In Cournot competition, solving the reaction functions simultaneously gives q1 = q2 = 6, leading to a price of P = 12 - 0.5(6 + 6) = $6. In Stackelberg competition, the leader firm produces more, resulting in q1 = 9 and q2 = 4.5, leading to a price of P = 12 - 0.5(9 + 4.5) = $5.25.

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