Scenario: Suppose there are only two firms in an industry, and their products are perfect substitutes for each other. Each firm had a fixed marginal cost of $5 and zero fixed cost of operation. The highest the consumers of this product are willing to pay for it is $10, and there are 200 consumers in this market.
-Refer to the scenario above.Suppose Firm 1 and Firm 2 have to come up with a pricing strategy simultaneously.In this case,Firm 1 will charge ________,and firm 2 will charge ________.

Question

Quizplus · Accepted Answer

Given that the products are perfect substitutes and the firms have to decide on pricing simultaneously, they will likely engage in price competition to attract consumers. Since both firms have the same marginal cost of $5, and there is a competitive pressure, they will both set their prices as low as possible while still covering their marginal costs. Thus, both firms will charge $5 to remain competitive, making choice D correct.

Scenario: Suppose There Are Only Two Firms in an Industry