Two firms compete as a Stackelberg duopoly.The demand they face is P = 40 − Q.The cost function for each firm is C(Q)= 4Q.The profits of the two firms are: A)  _L = $162;  _F = $81. B)  _L = $81;  _F = $40.5. C)  _L = $81;  _F = −$40.5. D)  _L = $162;  _F = $40.5.

Question

Quizplus · Accepted Answer

In a Stackelberg duopoly, the leader firm makes its production decision first, and the follower firm makes its decision afterwards, taking the leader's decision into account. The correct profits calculation involves solving the firms' reaction functions given the demand and cost functions. The profits mentioned in option A are consistent with the Stackelberg model outcomes, where the leader firm typically earns more profit than the follower firm due to its first-mover advantage.

Two Firms Compete as a Stackelberg Duopoly