DSE 2012 Question 23: Monopolistic competition and oligopoly
Consider a homogenous goods market with the demand function Q=30−P. There are two firms playing a price game in the following manner: firm 1 quotes a price and then firm 2 chooses a price. When they charge the same price they share the market equally and otherwise the market demand goes to the firm charging lower price. Firm 1 has a capacity constraint at the output level 5 units such that upto five units the marginal cost of production is Rs 3 per unit of output, however beyond 5 units it cannot produce any output. Firm 2 does not have any capacity constraint, it can produce any amount with the marginal cost Rs 6. What would be the equilibrium price in the market?
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Consider a homogenous goods market with the demand function Q=30-P. There are two firms playing a price game in the following manner: firm 1 quotes a price and then firm 2 chooses a price. When they charge the same price they share the market equally and otherwise the market demand goes to the firm charging lower price. Firm 1 has a capacity constraint at the output level 5 units such that upto five units the marginal cost of production is Rs 3 per unit of output, however beyond 5 units it cannot produce any output. Firm 2 does not have any capacity constraint, it can produce any amount with the marginal cost Rs 6. What would be the equilibrium price in the market? (A) 3 (B) 6 (C) 6-ϵ, where ϵ is very small positive number (D) 3+ϵ, where ϵ is very small positive number
Monopolistic competition and oligopoly has come up 104 times in 7 exams since 2004.
What this question tests
This question is on Bertrand competition, part of Monopolistic competition and oligopoly in Microeconomics.
Firms competing on price, and why identical firms price at marginal cost.
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