2. In the oligopoly market, on

2. In the oligopoly market, only two companies A and B producegoods of the same quality. Each company is involved in producinggoods.
The marginal cost and average cost are the same at 30. Whenthe market demand function is Q=900-10P, answer the followingquestions
– Draw the balance with Bertrand, and describe the process inwhich Bertrand’s balance was drawn.
-Draw the profits of each of the two companies in Bertrand’sbalance.

Answer:

1.

Balance in the Bertrand occurs when both the firms price theirproduct at the marginal cost. A simple to way to interpret this is,when a firm fixes price less than the other firm, the former getsthe whole market share. But in this case when price equals marginalcost, none of the firms will be willing to price below MC becausethey will incur losses although they gain the whole market share.So, equilibrium price level equals MC, both the firms have equalmarket share and the bertrand balance is achieved. Diagram is shownbelow to interpret this scenario.

p1N and p2Nis the equilibrium price andequals MC.

So, going by this p1 = p2 = 30

Market demand = Q = 900 – 300 = 600

2.

Q=q1 + q2

For firm 1:

Profits = Total revenue – Total costs

= pq1 – (Average costs×q1)

=q1×(p – average cost)

=0 {since p=MC= average cost)

Similarly profit is 0 for firm 2 as well.

Hope this helps. Do hit the thumbs up. Cheers!


 
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