Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of government intervention, the market has a Nash- Cournot equilibrium. Suppose demand is linear, p = 1 - q1 - q2, and each firm's marginal an average cost of production are constant at m. Government 1 maximizes net national income (it does not care about transfers between the government and the firm, so it maximizes the firm's profit net of the transfers). Show that Government 1's optimal s results in its firm producing the Stackelberg leader quantity and the other firm producing the Stackelberg follower quantity in equilibrium.

Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of government intervention, the market has a Nash- Cournot equilibrium. Suppose demand is linear, p = 1 - q1 - q2, and each firm's marginal an average cost of production are constant at m. Government 1 maximizes net national income (it does not care about transfers between the government and the firm, so it maximizes the firm's profit net of the transfers). Show that Government 1's optimal s results in its firm producing the Stackelberg leader quantity and the other firm producing the Stackelberg follower quantity in equilibrium.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter12: Price And Output Determination: Oligopoly

Section: Chapter Questions

Problem 1E

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