Consider a Stackelberg Duopoly with the Following Inverse Demand Function

question 34

Multiple Choice

Consider a Stackelberg duopoly with the following inverse demand function: P = 100 - 2Q₁ - 2Q₂. The firms' marginal costs are identical and are given by MC_i = 2. Based on this information, the Stackelberg leader's reaction function is:

• A) Q_L = 24.5 - 0.5Q_F.
• B) Q_L = 50 - 0.5Q_F.
• C) Q_L = 49 - 0.5Q_F.
• D) None of the answers is correct.

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Definitions:

Optimal Capital Structure

The best mix of debt, preferred stock, and common equity financing that maximizes a company's stock price while minimizing its cost of capital.

Earnings Per Share

A financial ratio indicating the amount of profit attributed to each outstanding share of common stock.

Cost of Equity

The return that investors expect for investing in a company's equity, usually considered in the form of dividends and share price appreciation.

Cost of Debt

The effective rate that a company pays on its total debt, factoring in interest payments, fees, and other costs associated with borrowing.