Suppose that firm 1 and firm 2 operate under conditions of constant average and marginal cost but that firm 1’s marginal cost is c1 = 10 and firm 2’s marginal cost c2 = 8. Market demand is Q = 500 − 20P.
(a) Suppose e two firms practice Stackelberg competition, where firm 1 chooses its output first then firm 2 chooses its output quantity second. Compute the Nash equilibrium quantity. (Note: solve the best response function for firm 2 first, using backward subsitution!)
(b) Compute firms’ prices, profit and market outcome in the Nash equilibrium.