Two firms have costs of AC1 = MC1 = 20 and AC2 = MC2 = 16 respectively. Market demand is Q = 1000 − 40P. a. Suppose irms practice Bertrand competition, that is, setting prices for their identical products simultaneously. Compute the Nash equilibrium prices. (To avoid technical problems in this question, assume that if irms both have the same price, then the low-cost irm makes all the sales.) b. Compute irm output, irm proit and market output. c. Is total welfare maximised in the Nash equilibrium? If not, suggest an outcome that would maximise total welfare, and compute the deadweight loss in the Nash equilibrium compared with your outcome.
Two firms have costs of AC1 = MC1 = 20 and AC2 = MC2 = 16 respectively. Market demand is Q = 1000 − 40P. a. Suppose irms practice Bertrand competition, that is, setting prices for their identical products simultaneously. Compute the Nash equilibrium prices. (To avoid technical problems in this question, assume that if irms both have the same price, then the low-cost irm makes all the sales.) b. Compute irm output, irm proit and market output. c. Is total welfare maximised in the Nash equilibrium? If not, suggest an outcome that would maximise total welfare, and compute the deadweight loss in the Nash equilibrium compared with your outcome.
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.4P
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1. Two firms have costs of AC 1 = MC 1 = 20 and AC 2 = MC 2 = 16 respectively. Market demand is Q =.
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1. Two firms have costs of AC1 = MC1 = 20 and AC2 = MC2 = 16 respectively. Market demand is Q = 1000 − 40P.
a. Suppose irms practice Bertrand competition, that is, setting prices for their identical products simultaneously. Compute the Nash
b. Compute irm output, irm proit and market output.
c. Is total welfare maximised in the Nash equilibrium? If not, suggest an outcome that would maximise total welfare, and compute the
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