Consider two firms that provide a differentiated product, which they produce at the same constant marginal...

Consider two firms that provide a differentiated product, which they produce at the same constant marginal cost, MC = 3 (no fixed cost). The demand function for Firm 1 is q1 = 10 – p1 + 0.5p2 and for Firm 2 is q2 = 20 – p2 + 0.5p1, where p1 is Firm 1’s price and p2 is Firm 2’s price.

a) Write the profit functions for these firms.( 8 marks)

b) What are the equilibrium prices and quantities? ( 15 marks)

c) Assume now Firm 1 has the advantage to set its price first followed by Firm 2, after Firm 2 observed the price set by Firm 1. What is the equilibrium price for each firm? ( 15 marks)

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Expert Solution

Rahul Sunny answered 1 year ago

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