In the Stackelberg model we saw in class there were two firms 1 and 2.

Suppose that the market demand is p(Q) = 60Q, where as in class Q is the aggregate quantity. The const function for firm 1 is c1(q1) = 10q1 and the cost function for firm 2 is c2(q2) = q2.

Firm 1 is the leader and Firm 2 is the follower.

(a) Solve for the follow's reaction function, and the leader's maximization problem.

(b) Describe the Stackelberg equilibrium and solve for the Stackelberg equilibrium outcome. Compute each firm's profit.