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7 June, 07:23

The following integrated series of questions relates to several sections in the text. Scenario 2: Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30minusQ The marginal cost to produce this new drink is $3. Refer to Scenario 2. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly?

A. $13.50

B. $9

C. $12

D. $3

E. None of the above

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  1. 7 June, 10:38
    0
    E. None of the above

    Explanation:

    The standard reaction function of firm 2 is given as = a-Cb/2b - 1/2*Qa

    P = 30 - (Qa + Qb)

    where a = 30 b = 1 and C = 3.

    Leader's output = (a + Cb - 2Ca) / 2b

    Leader's output = (30 + 3 - 3*2) / 2

    = 13.5 units.

    Reaction function of firm B,

    Qb = 30 - 3/2

    = 13.5 - 1/2*13.5

    = 6.75 units.

    P = 30 - (13.5 - 6.75)

    = $9.75

    Therefore, The price of this new drink in the long run if the industry is a Stackelberg duopoly is $9.75
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