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Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price

Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price equal to the marginal cost (MC). But what happens if the two firms have unequal marginal costs? Suppose that Dogwood has MC = $40 and Rose Petal has MC = $25. Assume firms can set prices such as $29.99. a. Explain why it is not a Nash equilibrium for both firms to set a high price such as $60. b. Explain why it is not a Nash equilibrium for both firms to set a price equal to the lower marginal cost of $25. c. Explain why it is not a Nash equilibrium for each firm to set a price equal to their respective marginal costs.

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