Stackelberg duopolists,Firm 1 and Firm 2,face inverse market demand Both have marginal cost, Let firm 2,the follower,set its output according to the formula Which of the following outputs maximizes the leader's profit?

Question

Stackelberg duopolists,Firm 1 and Firm 2,face inverse market demand  Both have marginal cost,  Let firm 2,the follower,set its output according to the formula  Which of the following outputs maximizes the leader's profit?

Quizplus · Accepted Answer

To maximize its profit, Firm 1 must set its output level such that it considers the output level of Firm 2 as given, and then chooses its own output level to maximize profit. This is known as the Stackelberg equilibrium. Substituting the expression for Firm 2's output into the inverse demand function yields: P = 11 - Q₁ - 1.5QS2U2B0 Taking the derivative of total revenue for Firm 1 with respect to its output (setting Firm 2's output as given) and setting it equal to zero, we obtain: 11 - 2Q₁ - 1.5(10 - 0.25Q₁ - 8) = 0 Solving for Q₁ yields: Q₁ = 15 Thus, the output level that maximizes Firm 1's profit is 15. Choice C is the correct answer.

Stackelberg Duopolists,Firm 1 and Firm 2,face Inverse Market Demand