00:01
We're gonna assess from the statement 1, which states that in the papv plane, the reaction curves of both companies slope downward.
00:13
So the reaction curve of each firm shows how it adjusts its price in response to the other firm's price to maximize its own profit.
00:24
Now, given the demand equations, firm a's demand qa increase when firm b's price pb increases because of the plus a to pb term, and similar logic applies to firm b.
00:40
And in this case, the slope of the reaction function depends on how the firm balances the tradeoff between increasing its price and losing some quantity demanded.
00:50
If each firm believes that raising its price while the other's price is high will not overly hurt its demand, each firm might increase its price as the rival's price increases, which would result in upward sloping reaction curves, not downward.
01:12
Downward.
01:13
But typically in oligopolies, reaction curves are assumed to slope downward due to the strategic substitutability in prices, where if one firm lowers its price, the other has to lower its price as well to remain competitive.
01:33
And the correctness of this statement depends on the specific nature of the product differentiation and cross -price elasticities.
01:41
But generally, assuming downward sloping curves without further information might be misleading.
01:48
So we're going to mark this as incorrect.
01:54
Statement 2.
01:58
So this statement states that in any case, it is impossible for both companies to earn positive profits...