Firm A and Firm B sell coffee and engage in Bertrand competition. They have a constant marginal cost equal to 10 and zero fixed costs. Total costs are therefore C(q) = 10q, for i = A, B. (a) Suppose that consumers perceive the two brands of coffee as perfect substitutes; demand for firm i = A, B is then equal to if p Pj if p. =Pj Describe what happens in equilibrium. Can firms make positive profits in equilibrium? (b) Now, assume that consumers consider the two products as differentiated: demand for firm A is QA (PA, PB) = 40-2PA+PB and demand for firm B is QB (PB.PA) = 40-2PB+PA. Compute best response functions and characterize an equilibrium for this setting. Can firms make positive profits in equilibrium? 40-P. Q.(Pi-Pj) = 0, 40-P
Firm A and Firm B sell coffee and engage in Bertrand competition. They have a constant marginal cost equal to 10 and zero fixed costs. Total costs are therefore C(q) = 10q, for i = A, B. (a) Suppose that consumers perceive the two brands of coffee as perfect substitutes; demand for firm i = A, B is then equal to if p Pj if p. =Pj Describe what happens in equilibrium. Can firms make positive profits in equilibrium? (b) Now, assume that consumers consider the two products as differentiated: demand for firm A is QA (PA, PB) = 40-2PA+PB and demand for firm B is QB (PB.PA) = 40-2PB+PA. Compute best response functions and characterize an equilibrium for this setting. Can firms make positive profits in equilibrium? 40-P. Q.(Pi-Pj) = 0, 40-P
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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