Suppose there are two firms competing through prices in a market. Here the inverse demand function...

  

Transcribed Image Text:

Suppose there are two firms competing through prices in a market. Here the inverse demand function is given by »-{ Q(P) = 20-2P, with probability/ 10-2P, with probability Thus, market demand itself is a random variable that may take two values. On the other hand, firms are assumed to be symmetric, having the same cost function given by C(q) = 2q. Both firms discount future expected profits with the same discount factor & € [0, 1). a) (3 points) What is the monopolistic collusion price when demand is high (h)? b) (3 points) What is the monopolistic collusion price when demand is low (1)? c) (3 points) What is the monopolistic collusion profit for the period when demand is high (h)? d) (3 points) What is the monopolistic collusion profit for the period when demand is low (1)? Assume that at t = 0, the economy is in a boom(high). e) (3 points) For which values of d can we ensure that firms will be able to sustain monopolistic collusion (IIIIcoll and II, IIcoll) as an SPE? = h Suppose there are two firms competing through prices in a market. Here the inverse demand function is given by »-{ Q(P) = 20-2P, with probability/ 10-2P, with probability Thus, market demand itself is a random variable that may take two values. On the other hand, firms are assumed to be symmetric, having the same cost function given by C(q) = 2q. Both firms discount future expected profits with the same discount factor & € [0, 1). a) (3 points) What is the monopolistic collusion price when demand is high (h)? b) (3 points) What is the monopolistic collusion price when demand is low (1)? c) (3 points) What is the monopolistic collusion profit for the period when demand is high (h)? d) (3 points) What is the monopolistic collusion profit for the period when demand is low (1)? Assume that at t = 0, the economy is in a boom(high). e) (3 points) For which values of d can we ensure that firms will be able to sustain monopolistic collusion (IIIIcoll and II, IIcoll) as an SPE? = h