Unformatted text preview: 1 and the number of pounds of cheese sold q 2 are given by the following demand functions: q 1 = 14 – p 1- .5p 2 q 2 = 19 - .5p 1 – p 2 (a) Are bread and cheese complements or substitutes in this problem? Defend your answer. (b) Suppose the firms choose prices simultaneously. Derive each store’s best reply function. Graph the best reply functions and find the Nash equilibrium. (c) Now suppose the two stores collude and set prices so as to maximize their joint profits. Find the prices that maximize joint profits. (d) Are the prices in part (b) higher, lower, or equal to the prices in part (c)? What is the intuition behind this result?...
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- Spring '10
- Game Theory, Flour, Harrington.