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Unformatted text preview: quiz. Now solve firm 1s problem. Firm 1s 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 2s 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 2s bestresponse to find q 2 * = 20....
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.
 Summer '07
 Dr.ShomuBanerjee
 Microeconomics

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