1. Firm A and Firm B make identical products. Industry demand is Q = 90 -...

1. Firm A and Firm B make identical products. Industry demand is Q = 90 - P. Both firms have a constant marginal cost of $30. There are no capacity constraints. a) Solve for the equilibrium price and quantity produced under Bertrand-Price model of competition. How much profits would they make? ii) Cournot-Quantity model of competition. How much profits would they make? b) Suppose that firm A is considering whether to invest in research and development that would lower its marginal cost to $15. How much would firm A be willing to pay for this research assuming 1) Cournot-Quantity model of competition 11) Bertrand-Price model of competition. Hint: solve for the equilibrium when A has a MC =15$ and B has a MC of $30 and compare the profits that you have found in part a) where they both had MC of $30 c) Now assume that Firm A has a capacity constraint of 30 units of production and Firm B has a capacity constraint of 20 units. In a Bertrand-Price competition model would the Bertrand - paradox hold? What would be the equilibrium price? How much profits would the firms earn?

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Rahul Sunny answered 1 week ago

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