Log in
Economics
4
answers
0
watching
161
views

Suppose that inverse demand is given by p(Q) = a-bQ, where Q is total quantity supplied in the market. There are two firms in the market, each with a cost function of c(q) = cq, now assume that the first firm moves before the second firm.

A) Compare the price level and level of output under Stackelberg to Cournot

B) What is the fundamental reason that the first firm in the stackelberg model is able to earn higher profits than in the Cournot model

Watch
4
answers
0
watching
161
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share
Already have an account? Log in
Share
Already have an account? Log in
Share
Paramjeet Chawla
Paramjeet ChawlaLv8
28 Sep 2019
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

Let the inverse demand curve be p(q) = a - bq. Suppose there are two firms, with constant marginal cost equal to c.

A) What happens to the profit of the first firm and the second firm?

B) What is the essential intuition for this result?

C) Is Stackelberg more efficient than Cournot?

Two identical firms compete in competition (Cournot competition) in the same market where the inverse demand is P(Q) = 100 − Q. The constant marginal cost of both firms is 10.

(a) Find the best response function for each firm.

(b) What is the Cournot (simultaneous) equilibrium?

(c) What is the Stackelberg (sequential) equilibrium if firm 1 chooses quantity first?

I just need part 3 for this problem!! Thank you!!

 

Part 1 Suppose the inverse market demand function for a two-firm Cournot model is given by P=49-Q where Q=q_1+q_2 is the total output produced in the market, P is the market price, q_1 is the quantity of output produced by firm 1, q_2 is the quantity of output produced by firm 2. The marginal costs of the two firms are MC1=2 and MC2=3. For a linear inverse demand function P=a+bq, the marginal revenue is given by MR=a+2bq.

1. Find the marginal revenue MR1 of firm 1 as a function of q_1 and q_2.

2. Setting MR1=MC1, determine the reaction function of firm 1.

3. Find the marginal revenue MR2 of firm 2 as a function of q_1 and q_2.

4. Setting MR2=MC2, determine the reaction function of firm 2.

5. What quantity of output will each firm produce? That is, use the two reactions functions to find q_1 and q_2.

6. What is the market price P.

7. Determine the profits of each firm assuming there are no fixed costs.

 

Part 2  Now, suppose the inverse market demand function for a two-firm Stackelberg model is given by P=49-Q where Q=q_1+q_2 is the total output produced in the market, P is the market price, q_1 is the quantity of output produced by firm 1, q_2 is the quantity of output produced by firm 2. Firm is leader and firm 2 is follower. The marginal costs of the two firms are MC1=2 and MC2=3.

1. What is the follower’s reaction function?

2. Determine the equilibrium output level for both the leader and the follower.

3. Determine the equilibrium market price.

4. Determine the profits of the leader and the follower assuming there are no fixed costs.

 

Part 3 Use information from parts 1 & 2 to compare the output levels and profits in settings characterized by Cournot and Stackelberg.

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in