Scenario: Two Firms, Firm 1 and Firm 2, Make Differentiated

question 37

Multiple Choice

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost) . There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 1 sets its price at $50 and Firm 2 sets its price at $25.Is this a Nash equilibrium? Why?

• A) No, because if Firm 1's price is $50, then Firm 2 should set its price below $25.
• B) No, because if Firm 2's price is $25, then Firm 1 should set its price below $50.
• C) Yes, because (a) if Firm 1's price is $50, then setting price at $25 is Firm 2's best response, and (b) if Firm 2's price is $25, then setting price at $50 is Firm 1's best response.
• D) Yes, because (a) if Firm 1's price is $50, then setting price at $25 or below is Firm 2's best response, and (b) if Firm 2's price is $25, then setting price at least $50 is Firm 1's best response.

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Definitions:

Strategic Alliances

Partnerships between two or more companies to pursue a set of agreed-upon objectives while remaining independent organizations.

Independent Achievement

Accomplishments or successes achieved by a person relying on their own efforts and skills without the help of others.

Multinational Corporations

Large companies that operate in multiple countries, beyond their original or home base, often involved in various businesses.

Domestic Labour Force

The total number of people within a country's boundaries who are available for work, including both the employed and those seeking employment.