In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost.
Why doesn't the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)? A) In this case, MR is negative and is less than MC, so the first-mover would be producing less than the optimal quantity.
B) In this case, MR is negative and is less than MC, so the first-mover would be producing too much output.
C) This is a possible outcome from the Stackelberg duopoly under these conditions.
D) We do not have enough information to determine if this is an optimal outcome for this case.
Question 2
A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS2 > CS1 > 0.
If the firm sets the entry fee equal to CS2, then the number of customers that actually buy the product is equal to: A) zero.
B) one.
C) two.
D) We don't have enough information to answer this question.
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