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Airbus and Boeing are duopolists that engaged in price competition and produces heterogeneous goods. If Airbus...

Airbus and Boeing are duopolists that engaged in price competition and produces heterogeneous goods. If Airbus faces the demand curve Q1= 48 - 2P1 +3P2, Boeing faces the demand curve Q2 =48 -2P2 + 3P1, and both firms face zero marginal cost. Determine Airbus reaction curve?

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Answer #1

The demand curve of Airbus is Q1 = 48 - 2P1 + 3P2

To find the reaction curve of Airbus, the following steps are used:

Step 1: Find the total revenue (TR) function of Airbus.

TR1 = P1 * Q1 = P1 * (48 - 2P1 + 3P2) = 48P1 - 2P12 + 3P1P2

Step 2: Find the derivative of TR1 function with respect to P1.

dTR1/dP1 = 48 - 4P1 + 3P2

Step 3: Since marginal costs are zero, equate dTR1/dP1 to zero.

dTR1/dP1 = 0

48 - 4P1 + 3P2 = 0

4P1 = 48 + 3P2

P1 = (48/4) + (3/4)P2

P1 = 12 + 0.75P2

Thus, the reaction curve of Airbus is P1 = 12 + 0.75P2

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