Consider two firms that compete in prices offering different qualities of handba
ID: 1127729 • Letter: C
Question
Consider two firms that compete in prices offering different qualities of handbags. The consumers have a preference for quality given by x[0,1]. The high quality handbags have a value of vH=10 and the low quality handbags have a value of vL=4. The indifferent consumer is x=(pH-pL)/6. Which of the following is true, regarding the price competition of firms?
A) The price equilibrium is pH=4 and pL=2
B) The price reaction of the low quality firm is given by pL=pH/2.
C) All the answers are correct.
D) The price reaction of the high quality firm is given by pH=3+pL/2.
Please show steps!
Explanation / Answer
Ans: A) The price equilibrium is pH=4 and pL=2
This is the point where demand and supply curves in the market intersect.