Two firms, producing an identical good, engage in price competition. The cost functions are c1 (y1) = 1:17y1 and c2 (y2) = 1:19y2, correspondingly. The demand function is D(p) = 800 - 50p. The firm that charges the lowest price gets the entire demand, while, if prices are equal, each firm gets exactly one half of the total demand. Firms can only charge prices that correspond to denominations of Canadian dollars (i.e., prices change by one cent).
(a) Suggest an equilibrium pricing scenario (i.e., one price per firm). Given the prices you propose, find the quantities that each firm is selling, the total market quantity, and the corresponding profits. Justify why the prices you propose are equilibrium prices (by showing that NO firm wants to deviate from the prices you propose).
(b) Repeat part (a) assuming that the Canadian economy run out of 1 cent and 5 cent coins (i.e., prices can change only in multiples of twenty-.ve cents).