Part 2: First Long QuestionThere are two French bakeries in a small town: Le MeilleurCroissant (C), owned by Camille, and Le Meilleur Pain AuChocolat (P), owned by Paul. In each period of an infinitelyrepeated game, they compete a la Bertrand, with marketdemand given by Q(pmin) = 10 - Pmin- Even though they sellidentical goods, they have different marginal costs: cc = 2 andCp = 4 (Paul bakes just as well but is bad at businessdecisions). There are no fixed costs. Now suppose that they separate. There is no more love.Assume each firm operates completely independently andthere is no collusion. What is the equilibrium price in themarket?Pmin - 6.5Pmin= 2Pmin= 6Pmin= 4O Pmin

Answered: Part 2: First Long Question There are…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Now suppose that they separate. There is no more love.
Assume each firm operates completely independently and
there is no collusion. What is the equilibrium price in the
market?
Pmin - 6.5
Pmin
= 2
Pmin
= 6
Pmin
= 4
O Pmin

Expert Solution

Step 1

As the two bakeries are now in a Bertrand price competition , both Bakeries aim to capture major market share . This game leads both players to undercut their prices sequentially to grab major market share .

Now , in this game both players can undercut prices till the point its equal to their marginal costs as beyond that it would not be profitable to produce .

It is given ,

MC of Paul = 4 , MC of Camille = 2

For above game Camille can undercut its prices till the point its just slightly lesser than 4 , and grab all of the market . This is because at price slightly below 4 will make Paul to stop production and leave market .

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