Question

1) Which of the following is true of the Symmetric Bertrand model of a duopoly?

a) Each firm matches the price increases by the other firm.

b) The firm that sets the lower price claims the entire market.

c) The total output supplied by the firms determines the market price.

d) Firms compete on multiple dimensions like quantity, price, and advertising.

e) The demand curve facing an individual firm is kinked at the market price.

Which of the following is true of product differentiation?

		Product differentiation increases information asymmetry in a market.
		Product differentiation reduces price differentials among competing goods by informing consumers about the features of a product.
		Product differentiation can be based on perceived differences among products.
		Product differentiation is the process of determining the optimal production of various products by a multi-product firm.
		Firms in a perfectly competitive market practice product differentiation to attract consumers.

Answer 1

1. ans B

A crucial assumption about the technology is that both firms have the same constant unit cost of production, so that marginal and average costs are the same and equal to the competitive price. This means that as long as the price it sets is above unit cost, the firm is willing to supply any amount that is demanded (it earns profit on each unit sold). If price is equal to unit cost, then it is indifferent to how much it sells, since it earns no profit. Obviously, the firm will never want to set a price below unit cost, but if it did it would not want to sell anything since it would lose money on each unit sold. In summary, Bertrand competition is often characterized as harsh, cutthroat competition between firms, driving prices down to marginal cost through a series of price undercutting.

2. ans A

In economics and marketing, product differentiation is the process of distinguishing a product or service from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own products.