Figure 115 According to the figure which of the following st

(Figure 11.5) According to the figure, which of the following statements is TRUE? I. If Firm B expects Firm A to charge $3, Firm B should charge $5.50. II. If Firm A expects Firm B to charge $6, Firm A should charge $7. III. The Nash equilibrium is for each firm to charge the same price.
	I, II, and III I and II III II

Solution

I assume that the firm which charges a lower price gets the entire market.

The Monopoly Price of the firms, i.e. the price at which Profits are maximum is given by the condition MR = MC.

Hence, each firm would want to charge the Monopoly price, which in our case is $4.

I is incorrect since if A charges $3, B charging any price above $3 wouldn\'t give it a market share, hence the profits are 0 in that case. The best it can do is charge $3 and share the market with A.

II is incorrect since if B charges $6, A can charge the Monopoly price $4 and get the entire market and make highest possible profits.

III is correct since in a Bertrand price competition, Nash equilibrium consists of both the firms charging same price.

Thus, III is correct.