Question: In problem 2 (see below), suppose that firm 2 acts as a price leader and can commit in advance to setting its price once and for all. In turn, firm 1 will react to firm 2’s price, according to the profit-maximizing response found earlier, P1=52.5+.25P ₂ . In committing to a price, firm 2 is contemplating either a price increase to P ₂ =$73 or a price cut to P ₂ =$67. Which price constitutes firm 2 s optimal commitment strategy? Justify your answer and explain why it makes sense.

"Two firms produce differentiated products. Firm 1 faces the demand curve Q1 = 75 - P1 + 0.5P2. Firm 2 faces an analogous demand curve Q2 = 75 - P2 + 0.5P1. For each firm, AC=MC=30. a.) Confirm that firm 1's optimal price depends on P2 according to P1=52.5+0.25*P2. b.) Explain why a lower price by its competitor should cause the firm to lower its own price. c.) In equilibrium, the firms set identical prices : P1=P2. Find the firms' equilibrium prices, quantities, and profits."

Price: $2.99

Solution: The downloadable solution consists of 2 pages
Deliverable: Word Document