Suppose there are two firms in a market where the (inverse) market demand of a product is given by: P(Q) = 60 – Q Q = q1 + q2

The costs of each firm are: c(qi) = 10qi + 25

Firm 1 is the quantity leader and firm 2 is the quantity follower (sequential quantity setting). The firms are selling identical products.

a. What are the profits of each firm in a regular Stackelberg (one firm is the quantity leader) setting? Show all of your work.

b. Suppose that firm 1 decides that it is going to produce 44 units. Will this increase its profits relative to part ‘a’ above? Show your work.

c. Is there another quantity that firm 1 should produce in order to increase its profits? Assume that firm 2 will leave the market if its profits are less than or equal to 0.