Question

QUESTION 11 Consider an industry served by two firms, say firm 1 and firm 2, that sell identical goods The firms set prices P and P2 simultaneously to maximise profits and each firms has constant marginal costs of production. Suppose that marginal costs are c1 - C2-c, 0< c<5 and the demand faced by firm 1 0 if P1 > P2 4 50if P1 < P2 And by firm 2 0 if P2 > P 25-4 if P1 P2 50-2 if P2 < P D(%) a) Define the concept of Nash equilibrium for this game [5 marks,] b) Show that in equilibrium PP2c. c) Is the equilibrium that you have found in (b) an example of the Bertrand Paradox? d) Suppose now that, after investing in R&D, firm 2 is able to reduce marginal costs [5 marks,] [5 marks] such that 0 < c2 < c1. What are the prices in equilibrium? Is the Bertrand Paradox still holding? [15 marks]

Can someone help me with this problem? Thank you for everything!

Answer 1

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Cow't cha