Exercise 2Firm A and Firm B sell coffee and engage in Bertrand competition. They have a constantmarginal cost equal to 10 and zero fixed costs. Total costs are therefore C₁ (9) = 10q, for i = A, B.(a)Suppose that consumers perceive the two brands of coffee as perfect substitutes; demandfor firm i = A, B is then equal toQi(Pi-Pj)40 - Pi0,40-P,if p < Piif p, > Piif pi=PjDescribe what happens in equilibrium. Can firms make positive profits in equilibrium?(b)assume that consumers consider the two products as differentiated: demand for firmA is QA (PA, PB) = 40-2pA+PB and demand for firm B is QB (PB-PA) = 40-2p8+PA. Compute bestresponse functions and characterize an equilibrium for this setting. Can firms make positive profits inequilibrium?

In Bertrand equilibrium, firms have control on prices and they change prices according to the…

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

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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