Let firm A face demand curve Q_A = 100 - P_A + .5P_Band firm B face demand curve Q_B = 100 - P_B + .5P_A. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost). Each firm acts as a Bertrand competitor. What is firm B's profit-maximizing price when firm A sets a price of $70 for its good? A) $70 B) $72.5 C) $74 D) $76.5

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Firm B's profit-maximizing price is $72.5 when firm A sets a price of $70 for its good. This is because firm B's demand curve is Q_B = 100 - P_B + .5P_A, so when firm A sets a price of $70, firm B's demand curve becomes Q_B = 100 - P_B + .5(70) = 135 - P_B. Firm B's marginal cost is 10, so its profit-maximizing price is P_B = 10 + (135 - P_B)/2 = $72.5.

Let Firm a Face Demand Curve QA = 100 -

Let Firm a Face Demand Curve Q_A = 100 -