Question

Scenario 12.3: 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 = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly? A. $12 B. $3 C. $9 D. $13.50 E. $9.75

Answer 1

Option E : $9.75

Step-by-step explanation:

As per the data given in the question,

The standard reaction function of industry = a-Cb ÷ 2b - 1 ÷ 2 × Qa

P = 30 - (Qa + Qb)

Here, a= 30

b= 1

C = 3

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

= (30 + 3 × 1 - 2 × 30) ÷ 2×1

= 13.5 units

Reaction function of industry B,

Qb = 13.5 - 1 ÷ 2 × 13.5

Qb = 6.75 units

P = 30 - (13.5+6.75)

= $9.75

Hence Option E is answer.