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Suppose firm 1 and firm 2 each produce the same product, and face a market demand curve by Q=5000-200P. Firm 1 and 2 have the same unit cost of production c=10.
(a) Write down each firm’s derived demand functions, profit functions and best response functions.
What is the Bertrand-Nash equilibrium outcome?
(b) What are the profits of each firm?
(c) Is this outcome efficient?
What would happen if real GDP growth fell to 2% per year? (f) Again go back to the baseline case; what happens to inflation if money velocity rises at 1% per year. What might cause money velocity to change like this?
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Snow peak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using?
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