In: Economics

# Two firms are participating in a Stackelberg duopoly. The demand function in the market is given...

Two firms are participating in a Stackelberg duopoly. The demand function in the market is given by Q = 2000 − 2P . Firm 1’s total cost is given by C1(q1) = (q1)^2 and Firm 2’s total cost is given by C2(q2) = 100q2. Firm 1 is the leader and Firm 2 is the follower.

(1) Write down the inverse demand function and the maximization problem for Firm 1 given that Firm 2 is expected to produce R2(q1).

(2) Compute the reaction function R2(q1) for Firm 2.
(3) Find the market price and the quantities supplied by the firms in the Stackelberg

equilibrium of this game.

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