Let Firm a Face Demand Curve Q_A = 100 -

question 6

Multiple Choice

Let firm A face demand curve Q_A = 100 - P_A + .5P_B and firm B face demand curve Q_B = 100 - P_B + .5P_A. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost) . Each firm acts as a Bertrand competitor. What are the Bertrand Equilibrium prices in this market?

• A) P_B = 72.5; P_A = 70
• B) P_B = P_A = 73.33
• C) P_B = 74; P_A = 87
• D) P_B = P_A = 74

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Definitions:

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs, indicating the profit beyond the normal return on investment.

Marginal Decision Rule

A principle stating that an action should be taken if, and only if, the marginal benefits are greater than or equal to the marginal costs.

MR

Short for Marginal Revenue, it refers to the extra revenue that an organization receives from selling one more unit of a good or service.

Maximizing Profit

The process a firm adopts to establish the optimal price and quantity for maximal profit.