In the Stackelberg Model, Suppose the First-Mover Has MR =

question 1

Multiple Choice

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.

---

Definitions:

Demand for Insurance

The desire or willingness of individuals or entities to pay for financial protection against certain risks or potential losses.

Quantity Demanded

Quantity demanded is the amount of a good that buyers are willing and able to purchase at a particular price over a specified period.

Insurance Policy

A contract between an insurer and a policyholder in which the insurer agrees to pay for specified losses in exchange for a premium.

Probability

A measure of the likelihood that an event will occur, often expressed as a fraction or percentage.