Suppose there are three firms with the same individual demand function. This function is Q = 1,000 - 40P. Suppose each firm has a different cost function. These functions are:
Firm 1: 4,000 + 5Q
Firm 2: 3,000 + 5Q
Firm 3: 3,000 + 7Q
a) What price should each firm charge if it wants to maximize its profit (or minimize its loss)?
b) Why are the price and output of firms 1 and 2 the same but different for firm 3?
c) Is fixed cost relevant in their price determination or not?
d) Discuss the advantage and disadvantage of cost structure between firm 1 and firm 3.
e) Suppose that price falls as a result of a price war. The two most likely prices as a result are $13 and $12. Which company, firm 1 or firm 3, is more vulnerable to price war when P = $13?
f) Which company, firm 1 or firm 3, is more vulnerable to price war when P = $12?