Assume that two firms produce differentiated versions of a good at identical and constant marginal cost,...

 

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Assume that two firms produce differentiated versions of a good at identical and constant marginal cost, MC₁ = MC₂ = 50. The firms face demand curves as follows: 91 = 1000-2p₁ + P2 921000 2pz + P₁ a) Under what type of circumstances is Bertrand competition a reasonable assumption? b) Write down each firm's profit function. c) Derive and graph each firm's best response function. d) Find the Nash equilibrium quantities, prices and profits. e) Assume now that firm 2's factory burns down so that q2 = 0, and firm 1 is left with a monopoly over its market. Calculate the monopoly quantity, price and profit for firm 1, and consumer surplus. f) Contrast the outcomes under monopoly and Bertrand competition and explain your results. Assume that two firms produce differentiated versions of a good at identical and constant marginal cost, MC₁ = MC₂ = 50. The firms face demand curves as follows: 91 = 1000-2p₁ + P2 921000 2pz + P₁ a) Under what type of circumstances is Bertrand competition a reasonable assumption? b) Write down each firm's profit function. c) Derive and graph each firm's best response function. d) Find the Nash equilibrium quantities, prices and profits. e) Assume now that firm 2's factory burns down so that q2 = 0, and firm 1 is left with a monopoly over its market. Calculate the monopoly quantity, price and profit for firm 1, and consumer surplus. f) Contrast the outcomes under monopoly and Bertrand competition and explain your results.

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ANSWER a Bertrand competition is a reasonable assumption when firms produce homogeneous or differentiated products there are only two firms in the mar... View the full answer