An industry has two firms-a Stackelberg leader and a follower. The price of the industry output is given by P = 84 - Q, where Q is the total output of the two firms. The follower has a marginal cost of $0. The leader has a marginal cost of $21. How much should the leader produce in order to maximize profits?

Question

Quizplus · Accepted Answer

In a Stackelberg model, the leader firm considers the reaction of the follower firm. The follower's reaction function is derived from its profit maximization, given by q_f = (84 - q_l)/2. The leader maximizes its profit by considering this reaction, leading to the optimal output q_l = 21.

An Industry Has Two Firms-A Stackelberg Leader and a Follower