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Assignment Questions

Firms 1 and 2 produce horizontally differentiated products. The demand for firm 1's product is given by the equation,

Q₁ = 100 - P₁ + P₂/2

The demand for firm 2's product is given by the equation,

Q₂ = 200 - 4P₂ + 2P₁.

Firm 1's marginal cost is MC₁ = $10, while firm 2's marginal cost is MC₂ = $20. The two firms compete in Bertrand competition, by simultaneously selecting prices.

Question 1: Is firm 2's product a substitute or a compliment for firm 1's product? Briefly explain. Your answer must reference firm 1's demand function.

Question 2: Does the demand for firm 2's product satisfy the law of demand ? Briefly explain. Your answer must reference firm 2's demand function.

Question 3: What is the equation of firm 1's best-response function?

Question 4: What is the equation of firm 2's best-response function?

Question 5: Find the equilibrium prices.

Question 6: Find the equilibrium profits.

Question 7: Which firm enjoys the greater market power?

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