Question

Question 4: In Canada, a burger restaurant named Harvey's and a chicken restaurant named Swiss Chalet compete for cold and hungry customers by choosing price (i.e. Bertrand competition with differentiated products). Since both produce food, they sell substitute products. However, their products are not identical and some consumers have a strong preference for one over the other. Suppose the demand for Harvey's is given by 9h = 24 – PH + 0.5ps and demand for Swiss Chalet is given by qs = 36 – ps +0.5ph. Harvey's marginal cost per meal is 2 while Swiss Chalet's is 4. (a) Write out each restaurant's profit function. It should only depend on ph and ps. (b) Find each restaurant's best response function and plot it, with ph on the horizontal axis and ps on the other. (c) Solve for the equilibrium prices of each restaurant. [Involves a decimal.] (d) Why is it that the equilibrium does not have both firms pricing at their marginal cost?

Answer 1

The above problem has been worked out in detail and the solution is provided in the snapshots attached below.

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