Suppose now the two firms become Stackelberg duopolists in which Firm 1 is a leader and Firm 2 a follower. Assuming that the market demand is the same as before, but the marginal cost for both firms is now MC = $20. If the follower takes the leader's output as fixed at Q₁, answer the following questions: (c) (6%) What's the Stackelberg equilibrium quantity for each firm? What's the market price?

8. Consider a market of risk-averse decision makers, each with a utility function U = √I. Each decision maker has an income of $90,000, but faces the possibility of a catastrophic loss of $50,000 in income. Each decision maker can purchase an insurance policy that fully compensates her loss. This insurance policy has a cost of $11,600. Suppose each decision maker potentially has a different probability q of experiencing the loss. (6%) What is the smallest value of q so that a decision maker purchases insurance?

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