In the subgame perfect equilibrium of the sequential duopoly game, Firm 1 produces 70, and Firm 2 produces 10 after Firm 1's production of 70, reflecting Stackelberg competition dynamics. Option c) is correct.
In the sequential duopoly game described, where Firm 1 chooses a quantity q₁ first, followed by Firm 2 choosing quantity q₂, the subgame perfect equilibrium involves Firm 1 anticipating the reaction of Firm 2 and choosing a quantity that maximizes its profit given this anticipation.
In this case, the equilibrium would likely involve Firm 1 producing a quantity that accounts for the response of Firm 2, aiming to maximize its profit. Looking at the given options:
The answer that aligns with the concept of Stackelberg competition is option (c): Firm 1 produces 70, and Firm 2 produces 10 after Firm 1 produces 70. This scenario is consistent with the leader-follower dynamic in a Stackelberg game, where Firm 1, as the leader, produces a larger quantity, and Firm 2, the follower, responds with a smaller quantity. This strategic interaction allows Firm 1 to capture a significant portion of the market share, as reflected in the equilibrium outcome.