Question

The following integrated series of questions relates to several sections in the text. Scenario​ 2: Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as​ follows: P​ = 30minusQ The marginal cost to produce this new drink is​ $3. Refer to Scenario 2. What will be the price of this new drink in the long run if the industry is a Stackelberg​ duopoly?

A. ​$13.50
B. ​$9
C. ​$12
D. ​$3
E. None of the above

Answer 1

E. None of the above

Step-by-step explanation:

The standard reaction function of firm 2 is given as = a-Cb/2b - 1/2*Qa

P = 30 - (Qa + Qb)

where a = 30 b = 1 and C = 3.

Leader's output = (a + Cb - 2Ca)/2b

Leader's output = (30 + 3 - 3*2)/2

= 13.5 units.

Reaction function of firm B,

Qb = 30 - 3/2

= 13.5 - 1/2*13.5

= 6.75 units.

P = 30 - (13.5 - 6.75)

= $9.75

Therefore, The price of this new drink in the long run if the industry is a Stackelberg​ duopoly is $9.75