Suppose two duopolists operate at zero marginal cost. The market ...

[jlmhmf]

Suppose two duopolists operate at zero marginal cost. The market demand is p = a - bQ. If firm 1 is the Stackelberg leader, what level of output will it choose?
 
  A) q1 = (a - bq2)/2b
  B) q1 = (a - 2bq2)/2b
  C) q1 = a/b
  D) q1 = a/2b

Question 2

XYZ Co operates in a competitive market. Its marginal product of labor is 1/L, and it takes the wage and price as given. Derive the firm's short-run demand for labor as a function of w and p. How much labor will the firm hire if w = 2 and p = 10?
 
  What will be an ideal response?

[Juro]

Answer to Question 1

D

Answer to Question 2

Setting w = p  MPL yields w = p/L or L = p/w. At w = 2 and p = 10, the firm hires 5 units of labor.