13.28. Suppose that Jerry and Teddy are the only two sellers of designer umbrellas, which consumers view
Question:
13.28. Suppose that Jerry and Teddy are the only two sellers of designer umbrellas, which consumers view as differentiated products. For simplicity, assume each seller has a constant marginal cost equal to zero. When Jerry charges a price pJ and Teddy charges pT, consumers would buy a total of between Chicago and San Francisco. Their demand curves are given by QA ! 1000 " 2PA # PU and QU !
1000 " 2PU # PA.
QA and QU stand for the number of passengers per day for American and United, respectively. The marginal cost of each carrier is $10 per passenger.
a) If American sets a price of $200, what is the equation of United’s demand curve and marginal revenue curve?
What is United’s profit-maximizing price when American sets a price of $200?
b) Redo part
(a) under the assumption that American sets a price of $400.
c) Derive the equations for American’s and United’s price reaction curves.
d) What is the Bertrand equilibrium in this market?
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