Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 2 sets the price at $25.If Firm 1 sets its price above $50,then its profit is ________.If Firm 1 sets its price above $30 and below $50,then its profit is ________.If Firm 1 sets its price below $30,then its profit is ________.

Question

Quizplus · Accepted Answer

If Firm 1 sets its price above $50, it will not sell any units because its price is more than twice Firm 2's price of $25, resulting in $0 profit. If Firm 1 sets its price above $30 (its cost per unit) and below $50, it can still sell its product at a profit because it covers its marginal cost and part of the market will buy from Firm 1. If Firm 1 sets its price below $30, it sells below its cost, making it impossible to earn a profit, thus $0 profit since it does not cover its costs.

Scenario: Two Firms, Firm 1 and Firm 2, Make Differentiated