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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Transcribed Image Text:Exercise 2
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 C₁ (9) = 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
Qi(Pi-Pj)
40 - Pi
0,
40-P,
if p < Pi
if p, > Pi
if pi=Pj
Describe what happens in equilibrium. Can firms make positive profits in equilibrium?
(b)
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) = 40-2p8+PA. Compute best
response functions and characterize an equilibrium for this setting. Can firms make positive profits in
equilibrium?
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