Refer to the following figure:

Two firms, A and B, produce similar, but not identical, products. BRA and BRB are, respectively, the reaction functions for firms A and B, which compete primarily by price.
-If firm A predicts B will set a price of $12, then firm A should charge a price of $______ to maximize A's profit.

Question

Refer to the following figure:

Two firms, A and B, produce similar, but not identical, products.  BRA and BRB are, respectively, the reaction functions for firms A and B, which compete primarily by price.
-If firm A predicts B will set a price of $12, then firm A should charge a price of $______ to maximize A's profit.

Quizplus · Accepted Answer

To maximize profit, firm A should charge a price that is slightly lower than the predicted price of firm B. This is known as undercutting. If firm A charges a price lower than $10, it may not make a substantial profit. If firm A charges a price higher than $10, it may lose customers to firm B. Thus, the best choice is to charge a price of $10.

Refer to the Following Figure