Price Leaders/Takers

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Leader with Multiple Price-Taking Followers

  1. The price taker will set their price equal to the marginal cost of producing the good. Their reaction function is essentially P=MC.
  2. To find out the level of production of the price setter, plug in the price taker reaction function (P=MC) into the market demand function.
  3. Find marginal revenue and marginal cost for the price setter, and solve for the quantity produced.
  4. Next, use the market demand function (with the reaction function of the price taker plugged in) to solve for the price of the product.
  5. Finally, solve for the quantity of the follower products produced by plugging in the price into the followers reaction function.