Question

1. Consider two firms engaging in Bertrand Competition. Each firm picks a price at which to charge for their good. All of the demand for the good goes to the firm with the lowest price, where the quantity demanded = 1000-P. If the firms’ prices are the same, firm 1 gets all of the demand. The cost-per-product produced by firm 1 is MC=2, and the costper-product produced by firm 2 is MC=5. Suppose that the firms can charge any continuous amount for their products (they’re not constrained to charging pennies). a. What is the profit/payoff function for firm 1 if there were no other firms in the market? (3 pts)

b. What is the profit/payoff function for firm 2 if there were no other firms in the market? (3 pts)

c. What is the profit/payoff function for firm 1 with firm 2 in the market? (This will have multiple cases based on how the prices of the two firms compare to each other). (3 pts) d. What is the profit/payoff function for firm 2 with firm 1 in the market? (This will have multiple cases based on how the prices of the two firms compare to each other). (3 pts) e. Consider what would happen if P1>P2>5. Would either firm 1 or firm 2 have an incentive to change their behavior? (2 pts) f. Consider what would happen if P2>P1>5. Would either firm 1 or firm 2 have an incentive to change their behavior? (2 pts)

g. Consider what would happen if P1=P2=5. Would either firm 1 or firm 2 have an incentive to change their behavior? (2 pts)

h. Consider what would happen if P1

Answer 1