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Consider a homogenous goods market with the demand
function Q = 30 -P, where Q and P denote quantity and price respectively.
There are two rms playing a price game in the following manner: rm 1
quotes a price and then rm 2 chooses a price. When they charge the same
price they share the market equally and otherwise the market demand goes
to the rm charging lower price. Firm 1 has a capacity constraint at the
output level 5 units such that upto ve units the marginal cost of production
is Rs 3 per unit of output, however beyond 5 units it cannot produce any
output. Firm 2 does not have any capacity constraint, it can produce any
amount with the marginal cost Rs 6. What would be the equilibrium price
in the market?
(a) 3
(b) 6
(c) 6 - e where e is very small positive number
(d) 3 + e , where e is very small positive number
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