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Firm 1 and firm 2 are Bertrand duopoloists
Firm 1 and firm 2 are Bertrand duopoloists. Firm 1 has a marginal cost of $5 per unit, and firm 2 has a marginal cost of $5 per unit. The demand for their product is p = 45.00 — Q, where Q is the total quantity demanded. How much does each firm sell in equilibrium? Assume that prices can only be set to the nearest cent, firms split the market if they set the same price, and there are no fixed costs.
Firm 1 production: (Round to two decimals if necessary.)
Firm 2 production: (Round to two decimals if necessary.)
Part 2 (2 points)
What are the profits for each firm in equilibrium?
Firm 1 profit: $
(Round to two decimals if necessary.)
Firm 2 profit: $ (Round to two decimals if necessary.)
Expert Solution
In bertrand game, price competition causes price to come down to marginal costs. Firm with lower marginal cost gets to stay in the market.
1) Computation of Production that Each Firm sell in Equilibrium:
In this case firm 1 has MC of $5 per unit and firm 2 has MC of $5 per unit.
In equilibrium, P = 5. Firm 1 and 2 will split the output equally.
Demand for the Product is P = 45 - Q
So,
Firm 1 production = (45 - 5)/2 = 20
Firm 2 production = (45 - 5)/2 = 20
2) Computation of Profit for Each Firm in Equilibrium:
Firm 1 profit = (P - MC)Q = (5 - 5)Q = 0
Firm 2 profit = (P - MC)Q = (5 - 5)Q = 0
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