question archive 1) Consider a market consisting of two firms where the inverse demand curve is given by P=500-2Q1-2Q2
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1) Consider a market consisting of two firms where the inverse demand curve is given by P=500-2Q1-2Q2. Each firm has a marginal cost of $100. Based on this information we can conduct that the equilibrium oligopoly output under Cournot competition and Stackelberg competition would be A) Cournot output is greater than Stackelberg leader's output. B) Cournot ouput is less than Stackelberg follower's output. C) Cournot output is less than Stackelberg leader's output. D) Cournot output is equal to Stackelberg follwer's output.
The correct answer is C) Cournot output is less than Stackelberg leader's output.
In this case, we are assuming two firms have demand curves of P = 500 - 2Q1 - 2Q2. This equation can be solved and then plotted on a supply/demand model. They each have the same marginal cost as well. If we are to assume they are both under a Cournot model, then they are both followers of Stackelberg competition and have followed a leading firm in a competitive decision.
The Cournot Model was developed to depict Cournot competition which describes how companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. Essentially, it is a model that discusses oligopoly competition. The Stackelberg model is related to game theory and asserts how the leading firm in an industry makes a decision first, and then other firms follow. So, in this case, we assume a leading firm(that has greater output) has made a business decision, and under Cournot competition the two firms have followed. So their output is less than the leader.