Unformatted text preview: 1’s reaction function, (
( ) ) () ( ) FOC
99 - =0 ()
By symmetry firm 2’s reaction function:
At equilibrium both firms will be operating on their reaction function:
Substituting () () ( ) Q = 33+33 = 66
( Market Price:
( ) )
) ( ) Please note that you can work it out in the way shown in de Villiers and Frank which uses the
residual Demand curve to derive the residual marginal revenue curve which will be made equal to
the Marginal cost curve, the resulting relationship is used to derive the Reaction functions.
The method use this worksheet is similar to the one in your lecture slides and is easier to understand
and work through. You are advised to use it.
d) The two firms compete on the basis of their prices in order to maximise profit. In order to
capture the market share, each firm lower its price in order to undercut the other firm. The
price will decrease till it is equal to the marginal cost. Since both firms have a marginal cost
of 1, they will both lower their prices till P = MC. Calculations are similar to...
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