Suppose there are two firms in a market: firm A and firm B. Further, assume that they produce a homogenous product at a constant marginal cost of $10. In the Bertrand model solution, firm A will charge a price:
A)Greater than firm B
B)Smaller than firm B
C) Equal to $10
D) Greater than $10

Question

Suppose there are two firms in a market: firm A and firm B. Further, assume that they produce a homogenous product at a constant marginal cost of $10. In the Bertrand model solution, firm A will charge a price: 
A)Greater than firm B
B)Smaller than firm B
C) Equal to $10
D) Greater than $10

Quizplus · Accepted Answer

In the Bertrand model, both firms are assumed to simultaneously choose prices for their identical products, and consumers will buy only from the firm offering the product at the lower price. As both firms have the same marginal cost of production, they would have an incentive to undercut each other's prices to gain market share. In competitive settings, this would eventually drive the price down to the level of marginal cost.

Therefore, in the long run, the equilibrium price in a Bertrand model with homogenous products is equal to the marginal cost of production ($10 in this case). So both firms would charge $10 for their products.

Suppose There Are Two Firms in a Market: Firm a and Firm