Firms 1 and 2 produce horizontally differentiated products. The demand for firm 1's product is given by the equation,
Q1 = 100 - P1 +P2/2
The demand for rm 2's product is given by the equation,
Q2 = 200 - 4P2 + 2P1.
Firm 1's marginal cost is MC1 = $10, while firm 2's marginal cost is MC2 = $20. The two Firms compete in Bertrand competition, by simultaneously selecting prices.
Question 1: Is Firm 2's product a substitute or a compliment for Firm 1's product? Briefly explain. Your answer must reference firm 1's demand function.
Question 2: Does the demand for firm 2's product satisfy the law of demand? Brieflyexplain. Your answer must reference firm 2's demand function.
Question 3: What is the equation of firm 1's best-response function?
Question 4: What is the equation of Firm 2's best-response function?
Question 5: Find the equilibrium prices.
Question 6: Find the equilibrium profits.
Question 7: Which firm enjoys the greater market power?