Posted by **jenny** on Sunday, September 7, 2008 at 10:59pm.

Suppose the inverse market demand equation is P = 80 ¡V 4(QA+QB), where QA is the output of firm A and QB is the output of firm B, and both firms have a constant marginal constant of $4. Firm B is the Stackelberg leader in this market.

(a)State the reaction function for firm A.

(b)Write down the profit equation for firm B.

(c)Calculate the profit maximizing output for firm B.

(d)State the output of firm A, and the Stackelberg equilibrium outputs.

(e)What is the industry output?

(f)Plot the Stackelberg equilibrium outputs on a graph (with the reaction functions).

(g)Compare the Cournot and Stackelberg equilibrium outputs. Explain why is it more profitable for the Stackelberg leader to produce more than the Cournot equilibrium output.

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