Unformatted text preview: quiz. Now solve firm 1’s problem. Firm 1’s profit is: 1 = pq 1 10 q 1 = (120 – q 1 – q 2 ) q 1 10 q 1 = 110 q 1 – ( q 1 ) 2 – q 1 q 2 . But because it is a leader, it can take into account how the follower is going to choose its output in figuring out the best level of output to produce. Therefore substitute firm 2’s bestresponse into 1 : 1 = 110 q 1 – ( q 1 ) 2 – q 1 (50 – 0.5 q 1 ) = 60 q 1 – 0.5( q 1 ) 2 . Differentiate this with respect to q 1 and set equal to zero: 60 – q 1 = 0, or q 1 * = 60. Substitute in firm 2’s bestresponse to find q 2 * = 20....
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 Summer '07
 Dr.ShomuBanerjee
 Economics, Microeconomics, Supply And Demand, $10, $20, Cournot Competition, Stackelberg competition

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