Two firms, Aero and Pareto, produce parachutes. Aero faces the demand curve q_A = 4,000 - 2P_A + P_P, and Pareto faces the demand curve q_B = 4,000 - 2P_P + P_A. Aero's output, q_A, is sold at a price of P_A. Pareto's output, q_P, is sold at a price of P_p. The firms' parachutes are differentiated. For simplicity, assume marginal costs are zero.
a. Solve for Aero's marginal revenue as a function of prices.
b. Solve for Aero's reaction function.
c. Solve for Pareto's marginal revenue as a function of prices.
d. Solve for Pareto's reaction function.
e. What price does each firm charge for its parachute?

Question

Quizplus · Accepted Answer

The Answer of Two firms, Aero and Pareto, produce parachutes. Aero faces the demand curve q_A = 4,000 - 2P_A + P_P, and Pareto faces the demand curve q_B = 4,000 - 2P_P + P_A. Aero's output, q_A, is sold at a price of P_A. Pareto's output, q_P, is sold at a price of P_p. The firms' parachutes are differentiated. For simplicity, assume marginal costs are zero. a. Solve for Aero's marginal revenue as a function of prices. b. Solve for Aero's reaction function. c. Solve for Pareto's marginal revenue as a function of prices. d. Solve for Pareto's reaction function. e. What price does each firm charge for its parachute?

Two Firms, Aero and Pareto, Produce Parachutes