Question

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows:

P = 30 - Q

The marginal cost to produce this new drink is $3.

Refer to the scenario above. What will be the price of this new drink in the long run if the industry is a Bertrand duopoly?

		$12
		$3
		$9
		$13.50
		none of the above

Answer 1

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Ans: $3.

Explanation:

Since MC is constant for both firms, price will settle down to lower of all marginal costs. Since it is same for both firms, it will settle down to 3. This is nash equilibrium outcome as deviation from this is loss making. Pricing above 3 causes firm to lose market as market goes to other firm with lower price(3). Going below 3 is again loss making as it will make margin negative.

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