A Stackelberg leader and follower choose their outputs to maximize their own profits.Local property taxes which constitute a lump sum tax for each of them are reduced by $500 per year for the leader and by $200 a year for the follower.In consequence, the firms
A)both increase their output, with the leader increasing its output by more.
B)both increase their output, with the follower increasing its output by more.
C)increase their output by equal amounts for each firm.
D)leave their outputs unchanged.
E)There is not enough information in the question to determine what the firms will do.

Question

Quizplus · Accepted Answer

A reduction in local property taxes, being a lump sum tax, affects the fixed costs of the firms but does not alter the marginal costs of production. In the context of the Stackelberg model, where firms make decisions based on marginal costs and revenues, a change in fixed costs does not affect the output decisions of either the leader or the follower. Therefore, both firms would leave their outputs unchanged.

A Stackelberg Leader and Follower Choose Their Outputs to Maximize