An industry has two firms, a leader and a follower.The demand curve for the industry's output is given by p = 456 - 6q, where q is total industry output.Each firm has zero marginal cost.The leader chooses his quantity first, knowing that the follower will observe the leader's choice and choose his quantity to maximize profits, given the quantity produced by the leader.The leader will choose an output of
A)25.33.
B)38.
C)19.
D)76.
E)None of the above.

Question

Quizplus · Accepted Answer

The leader will choose an output that maximizes its profit, considering the follower's reaction. The follower's best response is to produce half of the residual demand after the leader's output. Solving for the leader's optimal output in this Stackelberg model gives 38.

An Industry Has Two Firms, a Leader and a Follower