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10 August, 04:36

Scenario 12.3: 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 = 30 - Q The marginal cost to produce this new drink is $3. Refer to Scenario 12.3. What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly? A. $12 B. $3 C. $9 D. $13.50 E. $9.75

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  1. 10 August, 04:48
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    Option E : $9.75

    Explanation:

    As per the data given in the question,

    The standard reaction function of industry = a-Cb : 2b - 1 : 2 * Qa

    P = 30 - (Qa + Qb)

    Here, a = 30

    b = 1

    C = 3

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

    = (30 + 3 * 1 - 2 * 30) : 2*1

    = 13.5 units

    Reaction function of industry B,

    Qb = 13.5 - 1 : 2 * 13.5

    Qb = 6.75 units

    P = 30 - (13.5+6.75)

    = $9.75

    Hence Option E is answer.
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