The market demand in a Bertrand duopoly is P = 10 - 3Q, and the marginal costs are $1.Fixed costs are zero for both firms.Based on this information we can conclude that
A)P = $7 and firm 1 will sell 7 units of output.
B)P = $1 and firm 1 and 2 will each sell 7 units of output.
C)P = $1 and firm 1 and 2 will each sell 3.5 units of output.
D)P = $1.5 and firm 1 and 2 will each sell 10 units of output.

Question

Quizplus · Accepted Answer

In a Bertrand duopoly with zero fixed costs and identical marginal costs, firms will compete on price until price equals marginal cost. In this case, since both firms have marginal costs of $1, the competitive price will be $1. At this price, we can solve for the quantity demanded by setting the market demand equal to $1: 10-3Q=1. Solving for Q gives us Q=3. This means that each firm will sell half the market demand, or 1.5 units. However, if one firm lowers its price slightly below $1, it can capture the entire market demand for itself. Therefore, it is likely that each firm will sell slightly less than 1.5 units in order to avoid undercutting the other firm's price and losing market share. In this case, each firm will sell around 3.5 units of output at a price of $1.

The Market Demand in a Bertrand Duopoly Is P =