1. [30] Two firms produce a homogeneous good and compete in prices. Consumers buy the good from the firm that charges the lower price. In case the price charged by the two firms is the same, the firms split the demand. The linear demand curve for the product is given by Q=100A−P. Bothfirmshavethe same constant marginal cost of 40. (a) [10] Plot the best response functions on the axes, recording p1 on the horizontal axis and p2 on the vertical axis. Label the two best response functions. Make sure that you explain what the prices in equilibrium (and profits) for the two firms are when they choose prices simultaneously and interact only once. Assume now that both firms choose simultaneously but interact an infinite number of times. Each firm discounts the future based on the discount factor 0 < δ < 1.
1. [30] Two firms produce a homogeneous good and compete in prices. Consumers buy the
good from the firm that charges the lower price. In case the price charged by the two firms
is the same, the firms split the
Q=100A−P. Bothfirmshavethe same constant marginal cost of 40.
(a) [10] Plot the best response functions on the axes, recording p1 on the horizontal axis
and p2 on the vertical axis. Label the two best response functions. Make sure that you
explain what the prices in equilibrium (and profits) for the two firms are when they
choose prices simultaneously and interact only once.
Assume now that both firms choose simultaneously but interact an infinite number of times.
Each firm discounts the future based on the discount factor 0 < δ < 1.
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