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h11 - The Colorado College Department of Economics and...

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1 The Colorado College Department of Economics and Business Block 7 Econ 207 HW 11. 1. The pricing game between two firms, which can set either low or a high price, is given by the following normal form: (a) Find the Nash equilibrium or equilibria of the game. (2 points) (b) How would you label the actions to make it a quantity game like Cournot? (2 points) (c) Suppose demand for a commodity is given by Q = 10,000 – 1000P And marginal cost is constant at MC = 6. Derive the marginal revenue curve. Calculate the price and quantity associated with perfect cartel outcome. Compute industry profit, consumer surplus and deadweight loss. (6 points) 2. Consider a Cournot model where the market demand is given by Q = 120 – P with Q= q A +q B where q A, q B are the quantities produced by firm A and B, respectively. Suppose that marginal and average costs are constant at MC = AC = 30. Calculate the Nash equilibrium quantities for each firm, price and profits for each firm as well as total industry profits. (4+4 = 8 points) 3. Consider the Bertrand model of price competition with differentiated products. The
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