Suppose three firms face the same total market demand for their product. This de

Question

Suppose three firms face the same total market demand for their product. This demand is

        P                                               Q

$80                                          20,000

70 25,000

60 30,000

50 35,000

Suppose further that all three firms are selling their product for $60 and each has about one third of the total market. One of the firms, in an attempt to gain market share at the expense of the others, drops the price to $50. The other two quickly follow suit.

a. What impact would this move have on the profits of all three firms? Explain your reasoning.

b. Would these firms have been better off in terms of profit if they all had raised the price to $70? Explain.

Explanation / Answer

The share of market is equal for the three firms hence the total profit will be equal. The table above shows the share of profit of each firm under diffrent situations.

a. The salesof the firms will decrease to $ 583333.33 at $50 and therefore the profit.

b. The salesof the firms will also decrease to $ 583333.33 at $70 and therefore the profit.

Price Units Total Price 1/3 Share of each firm $          80       20,000      1,600,000 $                    533,333.33 $          70       25,000      1,750,000 $                    583,333.33 $          60       30,000      1,800,000 $                    600,000.00 $          50       35,000      1,750,000 $                    583,333.33

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.