Suppose duopolists face the market inverse demand curve P = 100 - Q,Q = q₁ + q₂,and both firms have a constant marginal cost of 10.If firm 1 is a Stackelberg leader and firm 2's best response function is q₂ = (100 - q₁)/2,at the Nash-Stackelberg equilibrium the prices the two firms charge are

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In a Stackelberg model, the leader firm makes its quantity decision first, taking into account the reaction of the follower. Given the follower's best response function, the leader optimizes its quantity to maximize profit. The equilibrium prices are determined by the market inverse demand function P = 100 - Q, where Q is the total quantity produced by both firms. Since both firms have the same marginal cost and are part of a duopoly where one is the leader, they end up charging the same price at equilibrium, which is option A, indicating that both charge a price of 40.

Suppose Duopolists Face the Market Inverse Demand Curve P =