Question

Now, suppose the inverse market demand function for a two-firm Stackelberg model is given by P=49-Q where Q=q1+q2 is the total output produced in the market, P is the market price, q1 is the quantity of output produced by firm 1, q2 is the quantity of output produced by firm 2. Firm 1 is the leader and firm 2 is the 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.