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- Bertrand Competition Two firms are competing simultaneously in their prices. The aggregate market demand is p = 20 - 4Q. The marginal cost is the same for both firms and is c = 5 (5 points). There are no fixed costs. a) Characterize the best response functions for both firms. Draw the graph of both firms' best response functions and characterize the Bertrand Equilibrium . b) Now suppose the firm 2 gets inefficient in its production so that the firm 2's marginal cost becomes c2 = 10, the firm 1's marginal cost is the same as before,c1 = 5. Draw the graph of the firms' best response functions and characterize the Bertrand Equilibrium . c) Instead suppose the firm 2 gets even more inefficient in its production so that the firm 2's marginal cost becomes c2 = 15, the firm 1's marginal cost is the same as before, c1 = 5. Draw the graph of the firms' best response functions and characterize the Bertrand Equilibrium .
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