Consider the example of the Stackelberg model discussed in the text. Firms choose quantities, with firm A
Question:
Q 120 P
and production is costless.
a. Recall that firm B's best-response function is
qB = 120 qA/2.
Substitute this best-response function into the equation for A's profit, to express A's profit as a function of qA, labeled ÏA. Next, substitute this best-response function into the analogous equation for B's profit to compute B's profit as a function of qA, labeled pB. Finally, write the expression for A's profit if B produces zero as a function of qA, labeled pM (where the M subscript stands for the fact that A is a monopoly if B produces zero).
b. Use the formulae from part a to fill in the following table.
c. Does your table from part b confirm the result from the text that firm A would choose qA 60 in the Stackelberg game? How much would A have to produce to deter B's entry if B had a fixed cost of entry equal to a bit more than 400? If B had a fixed, cost of entry a bit more than 100? Would it be worthwhile for A to deter B's entry in thesecases?
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Related Book For
Intermediate Microeconomics and Its Application
ISBN: 978-0324599107
11th edition
Authors: walter nicholson, christopher snyder
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