Question: Suppose there are two dominant firms: firm 1 and firm 2, who face the same marginal cost of c and have no fixed costs. We assume i) the two firms produce the homogenous goods, ii) the information is perfect and iii) there is no possibility in collusion between the two firms.

1. Work out the price that each firm will be likely to charge. Explain your answer.
2. Let assume that firm 2 is able to cut its marginal cost to c/2 but fails to become a monopolist because of its limited capacity constraint. What will be the new equilibrium price of each firm? Explain your answer.
3. Compare your answers of (a) and (b) and explain whether there is any price difference at equilibrium.

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