Answer Happy

Consider a duopoly in which two identical firms compete by setting their quantities but Firm has first mover advantage (i.e., Firm 1 is the Stackelberg Leader). We want to consider whether Firm 1 should use its advantage drive Firm 2 out of the market. Suppose the inverse market demand is P (91.92) =250-9₁-92 and each firm has a marginal cost of $70 per unit. Also assume that fixed costs are negligible. Strategy #1: Firm 1 does not drive Firm 2 out of the market If Firm 1 does not drive Firm 2 out of the market, the resulting equilibrium will be the Nash-Stackelberg equilibrium. Calculate the equilibrium when Firm 1 moves first and determine Firm 1's profits in this equilibrium. (Enter your responses rounded to two decimal places.) Equilibrium quantities: 9₁ and 9₂ = Equilibrium price: P = S Firm 1's profits: ₁ = $ Strategy #2: Firm 1 drives Firm 2 out of the market Consider an alternative strategy where Firm 1 produces a quantity that results in Firm 2 producing nothing. Calculate the minimum quantity that Firm 1 would have to produce to drive Firm 2 out of the market, the resulting market price, and Firm 1's profits. Firm 1's quantity: 9₁ = units. (Enter your response rounded to two decimal places.) Equilibrium price: P = (Enter your response rounded to two decimal places.) Firm 1's profits: ₁ = $. Firm 1 would need to continue producing at the higher level you found under Strategy # 2 to keep Firm 2 out of the market. Comparing Firm 1's profits under the strategies, what is the optimal strategy for Firm 1, the Stackelberg leader, to use? A. Strategy 1 O B. Strategy 2