Question

Question 3 Suppose that the market demand curve for golf balls is described by Q = 90 – 3P where Q is measured in kilos of balls. There are 2 firms that supply the market. Suppose first that golf balls produced by the 2 firms are identical. Firm 1 can produce a kilo of balls at a constant unit cost of $15 whereas firm 2 has a constant unit cost of $10. (a) Suppose firms compete in quantities. How much does each firm sell in a Cournot equilibrium? What is market price and what are the firms’ profits? Show your work. (b) Suppose firms compete in price. How much does each firm sell in a Bertrand equilibrium? What is market price and what are the firms’ profits? (c) Would your answer in (b) change if there were 3 firms , one with unit costs = $20 and 2 with unit costs = 10. Explain why or why not. (d) Would your answer in (b) change if firm 1’s golf balls were green and endorsed by Tiger Woods whereas firm 2’s are plain and white? Explain why or why not.

Answer 1