1. Stackelberg competition

Consider a market where two firms are competing according to the Stackelberg model. The inverse demand function is given as

p = 200 2q₁ q₂

The firms have identical cost functions given as

T C = 40q

a. What are the equilibrium quantities by firm 1 and firm 2 if firm 1 is the leader.

b. What are the equilibrium prices faced by the firms? (consider firm 1 as the leader).

c. What are profits? (consider firm 1 as leader) d. Now, if firm 2 has a chance to become the leader, do you think firm 2 would want to do that? (Hint: Calculate firm 2's profit if firm 2 is the leader. If this new profit is larger than the profit of firm 2 that you found in part c, then firm 2 would love to become a leader).