DSE 2010

Posted by Rahul on Jun 24, 2011; 10:12am
URL: http://discussion-forum.276.s1.nabble.com/DSE-2010-tp6511483.html

consider a bertrand duopoly with firms 1 and 2 that produce a homogenous good and set prices p1 and p2.demand function is (5-p).Firm 1 has constant average cost of 5/2 and firm 2 has constant average cost of 3/2.In equilibrium
a)p1=2=p2
b)p1=3=p2
c)p1=3 and p2=2
d)p1=3 and p2 is 2 or 3

As per solution ans is "d".Should not firm 2 sell at a price just below firm 1's marginal price??