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North Lake currently has one In‐n-­Out franchise. Daily demand for hamburgers in North Lake is given...

North Lake currently has one In‐n-­Out franchise. Daily demand for hamburgers in North Lake is given by Q=200-­10P. All In-­n-­Out franchises have costs of TC=50+3Q for producing Q hamburgers.Suppose a second In‐n-­Out opens, and the two stores compete by choosing output sequentially, with the current owner choosing first (Stackleberg). How will the equilibrium price for hamburgers change if the new franchise were to open.

Solutions

Expert Solution

* In Stackelberg model firms move sequentially. In this model one firm will set output first and other firms will follow after observing the output of leader. In this model leader recognizes that it can influence followers action because followers reaction curve is known to leader. Therefore reaction curve of follower will be substituted into profit function of model before maximizing it.

Rahul Sunny answered 1 year ago
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