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.

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