Question

) Suppose two identical firms with the constant marginal cost produce the same product and compete...

) Suppose two identical firms with the constant marginal cost produce the same product and compete in the market. (10) under which model the equilibrium profit for each firm must be zero? Bertrand or Cournot model, or neither

Homework Answers

Answer #1

Under Bertrand model, with two firms and with constant marginal cost that produce same product results in zero economic profit. The two firms set the same price to share both the markets and profits. However, if either firm lowers its price even a little it will gain whole market and capture most of the profits of the market. Now, both firms will try to undercut the prices until they sell the product at zero economic profit.

Thus, economic profit must be zero under Bertrand model.

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