Consider a duopoly in which two identical firms compete by setting their quantities but Firm 1 has first mover advantage (i.e., Firm 1 is the Stackelberg Leader). We want to consider whether Firm 1 should use its advantage to drive Firm 2 out of the market. Suppose the inverse market demand is P (9₁92) = 275-9₁-9₂ and each firm has marginal cost of $70 per unit. Also assume that fixed costs are negligible.Strategy#1: Firm 1 does not drive Firm 2 out of the marketIf Firm 1 does not drive Firm 2 out of the market, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Calculate the equilibrium when Firm 1 moves first and determine Firm 1's profits in this equilibrium. (Enter your responsesrounded to two decimal places.)Equilibrium quantities: q₁ = and q₂ =-Equilibrium price: P = $.Firm 1's profits: ₁ = $.Strategy #2: Firm 1 drives Firm 2 out of the marketConsider an alternative strategy where Firm 1 produces a quantity that results in Firm 2 producing nothing. Calculate the minimum quantity that Firm 1 would have to produce to drive Firm 2 out of the market, the resulting market price, andFirm 1's profits.Firm 1's quantity: q₁=units. (Enter your response rounded two decimal places.)(Enter your response rounded to two decimal places.)Equilibrium price: P =Firm 1's profits: ₁ = $Firm 1 would need to continue producing at the higher level you found under Strategy #2 to keep Firm 2 out of the market. Comparing Firm 1's profits under the strategies, what is the optimal strategy for Firm the Stackelberg leader, to use?OA. Strategy 1OB. Strategy 2

Introduction We have given two firms which compete with each other in terms of quantities. We have…

Suppose the inverse market demand is P (9₁.92) = 275-9₁-92 and each firm has a marginal cost of $70 per unit. Also assume that fixed costs are negligible. Strategy #1: Firm 1 does not drive Firm 2 out of the market f Firm 1 does not drive Firm 2 out of the market, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Calculate the equilibrium when Firm 1 moves first and determine Firm 1's profits in this equilibrium. (Enter your responses rounded to two decimal places.) Equilibrium quantities: q, and q₂ = Equilibrium price: P = $. Firm 1's profits: , $. Strategy #2: Firm 1 drives Firm 2 out of the market Consider an alternative strategy where Firm 1 produces a quantity that results in Firm producing nothing. Calculate the minimum quantity that Firm 1 would have to produce to drive Firm 2 out of the market, the resulting market price, and Firm 1's profits. Firm 1's quantity: q₁ = units. (Enter your response rounded to two decimal places.) Equilibrium price: P=. (Enter your response rounded to two decimal places.) Firm 1's profits: ₁ = $. Firm 1 would need to continue producing at the higher level you found under Strategy #2 to keep Firm 2 out of the market. Comparing Firm 1's profits under the strategies, what is the optimal strategy for Firm 1, the Stackelberg leader, to use OA. Strategy 1 OB. Strategy 2

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.3P