stackelberg model

Question 1

assumptions

Answer 1

two firms
Face the same demand curve
Different cost functions
Quantity leader
Quantity follower

Question 2

Diagram - quantity follower

Answer 2

q1 = x axis
q2 = y axis
Direction of profit is towards their axis where they act as a monopoly.
vertical line to showed fixed q1
tangency between isoprofit curves and vertical lines to create reaction curve

Question 3

what does the quantity leader do?

Answer 3

They act rationally. They know the quantity follower will respond optimally, f2(.). They then must profit maximise conditional on this expectation.

Question 4

derivative of quantity leader

Answer 4

Harder than that of follower

Question 5

Stackelberg equilibrium

Answer 5

Firm 1 chooses q1 such that it is firm 1’s best quantity against firm 2’s reaction function. Firm 2 chooses q2 in response to q1.

Question 6

Diagram qauntity leader

Answer 6

Produce where there is tangency between firm’s isoprofit curve and 2’s reaction function.