Reference no: EM132519680

Suppose there are two emergency hospitals in Townville, State ER and University ER. Overall demand function (number of patients) for emergency hospital visits in Townville is characterised as P = 120 - 2(qs + qu) per day, where P is the market price and qs and qu are the number of patients served by State ER and University ER, respectively. Marginal cost at the State ER is cs = 84 per patient. University has access to better equipment so their marginal cost is cu = 70. Suppose University ER is the Stackelberg leader and is able to choose their quantity of patients before State ER. State ER observes and then responds to the choice of University ER.

(a) Describe and explain the best response functions of State ER and University ER respectively.

(b) Describe and explain the strategies of State ER and University ER in the Subgame Perfect Nash Equilibrium (SPNE) of this game respectively. How much is the total surplus in the SPNE?

(c) Suppose that after State ER makes its choice of quantity of pa- tients, University ER is able to observe, react, and easily expand or contract its service. Consider the equilibrium in this new scenario. Is the equilibrium quantity of patients of University ER in the new equilibrium higher or lower than its (University ER's) quantity of patients in SPNE of (b)? Intuitively explain you answer.