Question

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 ____

Answer 1

In this case, Firm 1 will charge $5, and firm 2 will charge $5

Step-by-step explanation:

In a competitive market, where two companies have identical products, The companies try to capture the market by lowering the price of the product to attract the consumers in the market.

Firm 1 and Firm 2 are competitors with identical products and they will try to overcome their competitor. As the production of the product has a marginal cost of $5 and no fixed cost.

hence the price should be more than or equal to the marginal cost of the product to avoid losses.

As per pricing strategy simultaneously, the price should be as follow

Firm 1 Price = $5

Firm 2 Price = $5