... will be higher and higher, price will be lower and lower, profit will shrink because the supply quantity will largely exceed the quantity demanded by the consumers. (c) If firm 2 moves first that makes firm 2 the market leader. For any Q, firm 1 will choose q1 on its best response function. Thus firm 2 chooses q2 to maximize its profit. Firm 1: Quantity=q1, Unit cost=c1, Firm 2: Quantity=q2, Unit cost=c2, Industry Demand Curve p=a-Q (a>0) Q= q1+ q2 a> c2> c1>0 Analyse the Stackelberg equilibrium where Firm 2 is the leader: ?1=pq1-Mc1 q1=(a-Q) q1- Mc1 q1=(a- q1- q2) q1- Mc1q1 =(a- Mc1) q1- q12 - q1 q2 ??1/?q1=0 => a-Mc1- 2q1- q2=0 =>q1=(a-Mc1- q2)/2 q1*=(a-Mc1- q2)/2 (1) Reaction Function for firm 1 by symmetry q2*=(a-Mc2- q1)/2 (2) substitute (2) in (1) q1=(a-2Mc1+Mc2)/3 => q1*=(a-2Mc1+Mc2)/3 q2=(a-2Mc2+Mc1)/3 => q2*=(a-2Mc2+Mc1)/3 P=a-Q=a- q1-q2=a-(a-2Mc1+Mc2)/3-(a-2Mc2+Mc1)/3 = (a+Mc1+Mc2)/3 ?1=[a- q1- (a-2Mc2+Mc1)/3]q1 - Mc1 q1 ?2=pq2-Mc2 q2 =(a+Mc2+Mc1)/3 *(a-2Mc2+Mc1)/3-Mc2*(a-2Mc2+Mc1)/3 =2/3(a+Mc2+Mc1)q2-q22 ??2/?q2=0 =>2/3(a+Mc2+Mc1)-2q2 =0 q2=3(a+Mc1-Mc2) q1=Mc2-a-2Mc1 => p=-a-Mc1+2Mc2 ?1=( Mc2-a-2Mc1)2 -Mc1 (Mc2-a-2Mc1) ...

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