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There are only two firms in the market. Firm 1 produces Q1 units of the good and Firm 2 produces Q2 Total quantity supplied is Q = Q1+ Q2. The market demand is given by P = 50 - Q = 50 - Q1 - Q2.
Suppose Firm 1 enters the market first, and Firm 2 enters the market later. The cost functions for the two firms are the same: the average cost and the marginal cost are AC = MC = $10 and the fixed cost is FC = $0.
(A) What is the reaction curve of Firm 2 (RC2)? Write down your RC2 in the format of Q2 = f(Q1), where Q2 = f(Q1) means Q2 is a function f of Q1 that you need to find out.
(B) If Firm 1 moves first, what are the Stackelberg equilibrium quantities for the two firms (Q1 and Q2)?
(C) What is the equilibrium market price (P) of the Stackelberg model?
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