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Unformatted text preview: Problem Set 6 Solutions Econ 115a, Fall 2007 November 13, 2007 Problem 1 (a) Oligopoly: A market with few (but not many) sellers. (b) Nash Equilibrium: When both players are playing mutual best responses. That is, knowing the action of their rival, neither player wants to change his action. (c) Differentiated Products: Similiar products that consumers view as substitutes but not perfect substitutes. (d) Collusion: When rival entities cooperate for their mutual benefit. Problem 2 In the Bertrand model, firms offer perfectly identical goods, have a constant marginal cost and compete in prices. The perfectly identical goods assumption means that the firm with the lower price captures the entire market (and if the firms offer the same price, they split the market). If either firm was charging a price that was above marginal cost, the other firm would have an incentive to undercut his rival by one cent, and thus take the entire market. This undercutting continues until both firms set price equal to marginal cost.both firms set price equal to marginal cost....
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