problemset4

problemset4 - EC332, Fall 2009, Prof. Jordi Jaumandreu...

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EC332, Fall 2009, Prof. Jordi Jaumandreu Problem set #4 . 1. (Cabral) In a market with annual demand = 100 ,therearetwo f rms, A and B, that make identical products. Because their products are identical, if one charges a lower price than the other, all consumers will want to buy from the lower-priced f rm. If they charge the same price, consumers are indi f erent and end up splitting their purchases about evenly between the f rms. Marginal cost is constant and there are no capacity constraints. a. What are the single-period Nash equilibrium prices, and ? b What prices would maximize the two f rms’ joint pro f ts? Assume that one f rm cannot observe the other’s price until after it has set its own price for the year. Assume further that both f rms know that if one undercuts the other, they will revert forever to the non-cooperative behavior you described in a. c If the interest rate is 10%, is one repeated-game Nash equilibrium for both f rms to charge the price you found in part b? What if the interest rate is 110%? What is the highest interest rate at which the joint pro
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problemset4 - EC332, Fall 2009, Prof. Jordi Jaumandreu...

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