Suppose the inverse market demand for gasoline is given by P=a-bQ, where P is the price and Q is the joint, total quantity, q1+q2 of gasoline brought…

Suppose the inverse market demand for gasoline is given by P=a-bQ, where P is the price and Q is the joint, total quantity, q1+q2 of gasoline

brought to the market each day by firms 1 and 2, respectively. Suppose these two firms compete on price as in the Bertrand model. Denote      firm 1’s per unit price by p1 and its per unit cost by c1.Denote firm 2’s per unit price by p2 and its per unit cost by c2.

a.Suppose c1>c2. Write down each firm’s best response function. i.e.,p1=B1(p2) and p2=B2(p1).

(a)Best response function for firm 1: p1 such that c1 p1 p1 p2 p1 c1 Best response function for firm 2 : p2 such that c2 p2 p2 c2 if p2 c1if p2 c1 p2 p1 if p1 c2 if p1 c2

 
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