Question

Consider an oligopoly in which firms choose quantities. The inverse market demand curve is given by P=a−b(q1+q2), where q1 is the quantity produced by Firm 1, and q2 is the quantity produced by Firm 2. Each firm has a marginal cost equal to c. What is the equilibrium market quantity if the two firms acted as a cartel (i.e., attempt to set prices and outputs together to maximize total industry profits). How about the equilibrium market price? Instead of cartel, suppose now firm 1 acts as the leader and firm 2 acts as the follower. What is the Stackelberg equilibrium quantities determined by each firm? What is the equilibrium market price? Find π1π2 using the Stackelberg quantities and price. Whose profit is higher?

Answer 1

Profit maximizing condition is MR = MC

Under Stackelberg model, follower best response function is used to find quantity sold by leader.

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Step-by-step explanation:

See attached pictures for detailed explanation.