Question

Consider a BERTRAND duopoly where each firm's price MUST BE IN WHOLE DOLLARS. Each firm incurs a $320 fixed costs and can produce any quantity without additional cost. Market demand is P(Q)=100-Q. Firm 1 knows Firm 2 has chosen $66. What are Firm 1's profits if it best responds to Firm 2's choice?

Answer 1

Firm 1's profits, if it best responds to Firm 2's choice of $66, would be $1,924.

Step-by-step explanation:

When Firm 2 sets a price of $66, Firm 1 wants to respond with a lower price to attract customers. Firm 1 calculates that if it sets the price at $66 as well, it will sell a quantity of 34 units.

,

By selling 34 units at $66 each, Firm 1's total revenue would be $2,244.

Since Firm 1 has fixed costs of $320 and no additional production costs, its profit would be $1,924 ($2,244 - $320).

,

Therefore, when Firm 2 chooses a price of $66, Firm 1's profit, if it best responds, would be $1,924.