Suppose that an industry consists of two firms producing an identical product in which there is no brand loyalty by consumers. The inverse market demand for the combined output of both firms is P = 5 !0.001 (Q_A + Q_B). The marginal cost of production by firm A and firm B are $2 and $1, respectively. Firm B's best-response function is:

Question

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Firm B's best-response function is derived from setting its marginal revenue equal to its marginal cost and solving for its quantity in terms of Firm A's quantity. Given the inverse demand function and the marginal costs, the correct response for Firm B, which has a marginal cost of $1, is option C, indicating its output level is a function of Firm A's output.

Suppose That an Industry Consists of Two Firms Producing an Identical