Suppose there are two firms, Boors and Cudweiser, each selling identical-tasting

Question

Suppose there are two firms, Boors and Cudweiser, each selling identical-tasting nonalcoholic beer. Consumers of this beer have no brand loyalty so market demand can be expressed as P = 5 + .001 (QB + QC).

21. Assuming the firms behave as Cournot competitors, Boor’s best-response function could be

a.   QB = 2000 – 0.5PC                       

b.   QB = 1500 – 0.5QC                      

c.   QC = 2000 – 0.5QB

d.   QC = 1500 – 0.5PB

Consider the market for nonalcoholic beers from the previous question. Which of the following is the Bertrand reaction function for Cudweiser?

a.   QB = -2.5 + .05PC                        

b.   PB = 2.5 + .05PC                          

c.   PC = 2.5 - .05PB

d.   PB = 2.5 - .15QC

Explanation / Answer

Consumers of this beer have no brand loyalty so market demand can be expressed as P = 5 - .001 (QB + QC).

21. Assuming the firms behave as Cournot competitors, Boor’s best-response function is found from MR = MC condition. MR = 5 - 0.002QB - 0.001QC and MC = 2

Hence we have 5 - 0.002QB - 0.001QC = 2

3 = 0.002QB + 0.001QC

3000 = 2QB + QC

QB = 1500 - 0.5QC

Option B is correct

Now use the fact that  P = 5 + .001Q

1000P = 5000 + Q

Q = 5000 - 1000P

QB = 5000 - 1000PB - 1000PC

MRB = 5000 - 2000PB - 1000PC, MC = 0

We have 5000 - 2000PB - 1000PC = 0

5000 - 1000PC = 2000PB

PB = 2.5 + 0.05PC

Correct option is B.

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