*QUESTION NUMBER ONE DOES NOT NEED TO BE ANSWERED. IT IS THE INFORMATION NEEDED

Question

*QUESTION NUMBER ONE DOES NOT NEED TO BE ANSWERED. IT IS THE INFORMATION NEEDED TO ANSWER QUESTION NUMBER 2.*

1. Consider two firms 1 and 2, each producing an identical good simultaneously. This good has market demand given by the inverse demand function p = 10 - Y, where Y = y1 + y2. Cost function : TC(y) = y for both firm. A) Solve for the equilibrium price and quantities B) Is your answer in part a) the only equilibrium possible?

2. Take the same industry outline in question 1 and imagine that firms choose prices rather than quantities. Consumers split themselves evenly across the firms if the firms set the same prices, otherwise all consumers shop at the lower-priced firm. Define a Nash equilibrium in prices p1 and p2. Solve for the equilibrium and EXPLAIN your work.

*QUESTION NUMBER ONE DOES NOT NEED TO BE ANSWERED. IT IS THE INFORMATION NEEDED TO ANSWER QUESTION NUMBER 2.*

Explanation / Answer

Snce both firms have the same Marginal cost = 1 dTC(y)/dy = 1.

Each firm will charge P = MC = 1.

Suppose a firm chargesP>1 then it will get to sell zero output and receive Profit = 0

while if it charges P<1 it suffers loses since TR<TC.

Thus the Nash equilibrium is to charge p1 = p2 = 1.

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.