MICROECONOMICS S1 is supply curve of firm 1, and S2 is the supply curve of firm 2, and Q is the total demand quantity of the market which equals Q1 plus Q2. I think if they choose prices simultaneously, firm 1 have a space to choose a lower price than f

University Degree Business and Administrative studies

EC 202 MICROECONOMICS

Spring Assignment

Question 1.

(a)

S1 is supply curve of firm 1, and S2 is the supply curve of firm 2, and Q is the total demand quantity of the market which equals Q1 plus Q2.

I think if they choose prices simultaneously, firm 1 have a space to choose a lower price than firm 2 because of its lower cost. From the figure, we can see that if firm 2 wants to meet the demand of current market, it has to set higher price than firm1 because it is not an efficient with high cost of unit, and if it want to expand production to supply enough products, firm2 has to increase its price to cover its increasing cost. However, firm1 is an efficient manufacturer, so it can compete with firm2 by setting lower price which is supported by its lower cost of unit (C1).

Ceteris paribus, the more these two firms to produce, the lower the market price will be.

In this case, the equilibrium price may be decided by firm1, and outputs will be higher and higher, price will be lower and lower, profit will shrink because the supply quantity will largely exceed the quantity demanded by the consumers.