Question
In a small town, there are two bakeries, Poilne and Tartine, selling sourdough bread. It costs Poilne Bakery $4 to produce one loaf of bread
In a small town, there are two bakeries, Poilne and Tartine, selling sourdough bread. It costs Poilne
Bakery $4 to produce one loaf of bread and it costs Tartine Bakery $3 to produce one loaf of bread. Both
bakeries are trying to maximize their profits by choosing how much bread to produce simultaneously. De-
note the number of loaves produced by Poilne Bakery by qp and the number of loaves produced by Tartine Bakery by qt . Assume that Poilne Bakery and Tartine Bakery do not have any market power. Price of one loaf of sourdough bread is determined by the demand curve which is given by
P = 30 ( qt + qp)
a) (1 points) Write down the profit function of Poilne bakery.
b) (1 points) Write down the profit function of Tartine bakery.
c) (5 points) Find the best reply function of Poilne bakery.
d) (5 points) Find the best reply function of Tartine bakery.
e) (5 points) Find the Nash equilibrium using the best reply functions you derived in part c and d.
f) (4 points) Draw the best reply functions you found in part c and d in the same graph. Show the Nash
equilibrium on your graph.
g) (4 points) Calculate equilibrium profits of the two bakeries.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started