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Economics - Assignment Example

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The firms face a constant marginal cost (Cj(Qj) = cqj for c > 0, and c1 = c2 = c for each firm. Also assume a linear inverse demand function, P(Q) = a – bQ, for a = demand intercept, and b > 0 being the slope. Firm 1…
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Download file to see previous pages... 6 & 7 of Shy or the notes).
Prices fall and quantity supplied increases. The economic welfare is better than in the cournot conditions. Although profits fall, consumer surplus increases and equilibrium approaches the competitive case.
2) Now let’s find out if the above results you derived are actually true!! Use the StackelbergSolver macro and enter the data with marginal cost = 4, a = 1,000 and b = -2 and derive the Stackelberg results. Of course you are also going to have to use the CournotSolver. Why? Explain your results. Do your results conform to the theory you provided above in problem 1? Display your results.
In the Bertrand model, the firms set prices simultaneously instead of quantity. The model is only valid in an oligopolistic, market structure where there are few firms selling too many buyers. As matter of fact, it’s easier and cheaper to adjust prices than quantity. However, the process of “priced cuts” can be risky.
Equilibrium price and quantity in a Bertrand model is the competitive equilibrium. Note that the firms can either set price or quantity but not both. In the Bertrand model the firms set price simultaneously.
Consider a 2-firm case, suppose firm 1 moves first and sets price p> MC, in an effort to maximize profit. Firm 2 will have an incentive to lower the price such that p1>p2>MC, to capture a larger market share. Rationally, consumers will shift to the lower price, p2 and firm 1 will make zero profits. The assumption is that, consumers are well informed and the products are homogeneous.
Firm 1will thus cut its price making it lower than P2. The game continues until both firms charge a price equal to MC, and make zero economic profits. At this price no firm would either raise prices; leads to zero sales, or lower prices; at p < mc the firm is experiencing losses.
5) a) Below is a table showing the payoffs for price strategies that each of 2 firms can make. These profits are derived from the ...Download file to see next pagesRead More
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