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Question 2 (14 marks) Consider a Bertrand model with two firms facing the market demand O(p) =100 - p . Both firms have a constant
Question 2 (14 marks) Consider a Bertrand model with two firms facing the market demand O(p) =100 - p . Both firms have a constant marginal cost of 20. It is assumed that each firm has a capacity large enough to meet the market demand all by itself. a) Derive the best-response functions of the firms. b Plot the best-response functions and show the Bertrand Nash equilibrium. C) What are the Bertrand Nash equilibrium and equilibrium profits of the firms? Suppose now that firm 2 discovered a new technology that lowers its marginal cost to 10. d) How does this affect the best-response function for firm 2? Plot the best-response functions and show the new Bertrand Nash equilibrium. e) Does the Bertrand Paradox hold in this case? Explain
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