Consider two firms producing A homogeneous good in the market. They face a marke
ID: 1249748 • Letter: C
Question
Consider two firms producing A homogeneous good in the market. They face a market demand curve P = 8 - Q. Each firm has a cost function to C(Qi) = 2Qi. Assume the two firms compete according to Bertrand competition. Find equilibrium price, firm outputs. industry output, and Him profits, Find consumer and total surplus. What is the deadweight loss compared to the perfect competition benchmark? Now assume the cost of Firm 1 has decreased to C (Q1) = Q1, while that of Firm 2 remains the same. Find equilibrium price, firm outputs, industry output, and firm profits. Find consumer surplus and total surplus. Is there a Rain/loss from total surplus as compared to part (a)? Suppose now that the firm sell differential products with the original cost functions C (Qi) = 2Qi, and compete according to Bertrand competition. The demand for each firm's outputs are: Find the reaction functions of Firm 1 and Firm 2. Solve for the Nash equilibrium. Is the Nash equilibrium that you found in part (c) Pareto efficient from the perspective of the firms (i.e. there is no other pair of prices that leads to higher profits for both firms)? If not., what are the prices that will maximize the total profits of the two firms? What are the profits for each firm?Explanation / Answer
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