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- Bertrand Market Condition

- Macro & Microeconomics
- Assignment
- Undergraduate
- Pages: 2 (500 words)
- December 15, 2020

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The paper "Bertrand Market Condition" is a great example of an assignment on macro and microeconomics. Where v is the power – security concern parameter of employees C is the employer's cost function of employees Sampling distribution of Y=Y/S-N {M, n} For making Bayesian inference as well as the decision, The employees use of prior distribution of S as well as combines the prior and likelihood function to form posterior distribution of S S/Y-N {m^} ^, l} In which case, 1 is the lambda S= {l/ (l +n) y} + {n/ l+n} m} = Y+ {1- a} S With nn {+n} In ascertaining its capability, employees solve MaxE=Function of {B(S+V/S2)-C in S2} function of(S, Y) dS Where, Function of {in S2} f(S/Y) dS= {B(S^+v/S2)-C in S2} Therefore, The first order will be: E/S= {B (S1^+V/S2) C/S2=0} The optimal solution, therefore, will be S2= {B (M^+v/c)} The employee’ s reaction function will thus be S2/S1-N {B (S1+ [1+] S+v)/c, (Bc) n} Question two Q is the output of firm 1, Q2 is the output of firm 2 Prior distribution (q) =q-N (q, p) Noise term observed by firm 2 R=q+E Where E is the noise term with a normal distribution E-N (O, k) Profit function of firm 2 P= (D-q-q2-C2) q2 The statistical decision problem of the employer, therefore, would be Q/Y-N {M^, ^] Maximizing (P)=f{Beta(q+v)/q2-C in q2}f(Q, Y)dq={Beta(q+v)/q2-Cin q2} F is the function. Therefore, the first-order condition will be p/q2={beta(q^+v/q2)-c/q2}=0 The optimal solution for Q2 will therefore be Q2=Beta{Q^+V}/c Question three R is the rate of inflation, Prior distribution (r)=r-N(r, o) and is common knowledge Noise term=r-E Normal distribution of =E-(N, I) Probability of success for the representative economic agent P=Br/Br+r2 Odd ratio of success for the government will be {1-p/p}==(r2/Br) Therefore the pay off function of representative economic agent will be P=B(R+v)/r2}-C in r2 V is the power security concern for the representative economic agent The sampling distribution Y hence will be, For making the Bayesian inference as well as the verdict, the representative economic agent will thus appreciate prior distribution as well the combined prior and likelihood function (f) to come up with the posterior distribution of r R/y-N(m^N^) But R={Y+(1+}r n} n/+n} Therefore in ascertaining the ability of the representative economic agent we, Min loss (L) =f {B(r+v)/r2-c in r2} f[r, y] dr} The first-order condition in order to optimize the solution will be, E/r2=B(r+v)/r2-c/r2} =0 Hence an optimal solution will be R2= {B(R+V}/c Question four: Cournot market collusion Firm 1 profit function =1-c-q1-q2) -q1+(1-c-q1-q2))=0 Q1=R1(q2)= (1-c-q1-q2)/2} R1(q2) is a firm 1 best response function For firm 2, A bisymmetry is depicted R1(q2)= (1-c-q1-q2)/2} Solving for equilibrium yield={Q1c, q2c)]={1-c/2+y, 1-c/2+y)} Question four (b) The pair of (q+q2) is Cournot equilibrium where neither firm can augment its profit by choosing some quantity Firm 1= C (q1) =20q Firm2=C (q2) =20q2 Inverse market demand function (p) =220-(q1-q2) Price=P (pq1-q2) This, therefore, implies that firm 1 profit is given by Profit=q1 (p (q1+q2)-c In finding Cournot Nash equilibrium in order to trigger the collision, the optimal solution is to find the reaction function Let the price function for the industry be= p (q+q2) And firm 1 cost structure be C1 (q1) Profit function=P (q+q2)*q-C (q) The Nash equilibrium will, therefore, P(q1+q2)-c{q1}+q1p1(q1+q2)=0 P(q1+q2)-c{q2}+q2p1(q1+q2)=0 Question five: Bertrand market condition (differentiated product) Firm1 profit p=(p1-c)1/(1-y^2)-p1+yp2} 1/1+y^2{1-y}-p1yp2 -1/(1-y^2){[1-c] P1=R1(p2)={(1-y)+c+yp2/2} There is symmetry in firm 2=(1-y)+c+yp1/2} Hence, p1,p2 are a strategic complement for y> 0 as well as a strategic substitute for y=< 0 which is the precise opposite of the Cournot model. Solving equilibrium yield (p1,p2)={(1-y)+c/2-y. (1-y)+c/2-y} Question five B: Bertrand market condition (homogeneous product) The game can be solved by finding the intersection of a firm’ s reaction function Aggregate demand p=220-(q1+q2) P=220-40=180 The profit function ® for firm 1, therefore, will be R=P (q1+q2) q1-(q1) 2/ (q1+q2) q1}-180q1 To get a firm 1 reaction function, we take the first-order condition Max q1 {2/ (q1+q2) q1-180q1} O=2/ (q1+q2)-(2q1/ (q1+q2))-180 90(q1+q2) ^2=q1+q2) ^2=q1+q2-q1 2(q1+q2) =q2^0.5 Q1=0.5q1-q1 Since firm 2 is identical to firm 1, its reaction function will be the same Q2=0.5q1^0.5-q1

References

Charles Noussair, Steven Tucker. A Collection of Surveys on Market Experiments - Page 52. 2013.

David Besanko, David Dranove, Mark Shanley. Economics of Strategy - Page 228. 2009.

David Besanko, Ronald Braeutigam. Microeconomics - Page 543. 2010.

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