A Stackelberg Leader and Follower Choose Their Outputs to Maximize

question 8

Multiple Choice

A Stackelberg leader and follower choose their outputs to maximize their own profits.Local property taxes which constitute a lump sum tax for each of them are reduced by $500 per year for the leader and by $200 a year for the follower.In consequence, the firms

• A)both increase their output, with the leader increasing its output by more.
• B)both increase their output, with the follower increasing its output by more.
• C)increase their output by equal amounts for each firm.
• D)leave their outputs unchanged.
• E)There is not enough information in the question to determine what the firms will do.

---

Definitions:

AVC

Average Variable Cost, the total variable cost divided by the quantity produced, representing the cost of labor and materials for each unit of output.

ATC

Average Total Cost (ATC) refers to the total cost per unit of output produced, comprising both fixed and variable costs.

Variable Costs

Costs that change in proportion to the level of activity or volume of output in production.

Fixed Costs

Business expenses that remain constant regardless of the level of production or sales, such as rent or salaries.