Final answer:
In a Stackelberg duopoly with linear inverse demand and identical marginal costs, the leader can secure higher profits than the follower (b). However, in cutthroat competition, oligopolistic firms will eventually earn zero economic profits. By forming a cartel, firms can earn positive economic profits similar to a monopoly.
Step-by-step explanation:
In a homogeneous product Stackelberg duopoly with a linear inverse demand function and constant marginal costs for both firms, different outcomes can emerge for the profits of the leader and the follower. If the leader firm sets the quantity first, assuming other conditions such as the marginal revenue (MR) equaling marginal cost (MC) are met, and disregards the reactions of the follower, it can secure a profit. However, the follower firm will produce based on the leader's output, which typically results in lower profits for the follower compared to the leader.
In the case of cutthroat competition, firms in an oligopoly expand output and cut prices to capture market share and profits, leading to zero economic profits in the long-run equilibrium as average cost equals demand. In contrast, if firms act as a cartel and monopolize the market, they can earn positive economic profits by setting a monopoly quantity where MR = MC and the monopoly price where the demand curve lies above this quantity.