Two Firms That Are Engaged in Stackelberg Competition Face the Market

Multiple Choice

Two firms that are engaged in Stackelberg competition face the market inverse demand curve P = 100 - 2Q, where Q is the total market output comprising Firm 1's output, q₁, and Firm 2's output, q₂. Each firm produces the product at a constant marginal cost of $22. If Firm 2's reaction function is q₂ = 22 - 0.5q₁, what is Firm 1's (the first-mover's) inverse demand curve?

A) P = 88 - 2q₁
B) P = 56 - q₁
C) P = 100 - 2(q₂ - 22 + 0.05q₁)
D) P = 88 - 1.5q₁