Stackelberg Competition

Consider the same demand and cost functions of; Market-level inverse demand is given by: P = 400-10Q. Firms have the same cost functions: C = 40q.

Now assume there are two firms in the market, but Firm 1 has an opportunity to publicly commit first to a chosen quantity level (as in the case of Stackelberg Competition). Then Firm 2 observes Firm 1's choice, and responds to this. (30 points)

(a)Solve for the equilibrium production levels of each firm,total market quantity,the market price, the profits of each firm, and consumer surplus. Which firm (or firms) are better off or worse off than before? Are consumers better off or worse off? (15 point)

(b)Given Firm 2's production level, would Firm 1 want to change its production and, if so, what production level would it choose? What would be the market price? If that was the production level of Firm 1, what production level would Firm 2 choose? And what would be the market price? If they keep adjusting to each other, what would be the market price and production level of each firm? (15 points)