Two firms have costs of AC1=MC1= 20 and AC2=MC2=16 respectively. Market demand is Q=1000−40P.
a. Suppose firms practice Bertrand competition, that is, setting prices for their identical products simultaneously. Compute the Nash equilibrium prices. (To avoid technical problems in this question, assume that if firms both have the same price, then the low-cost firm makes all the sales.)
b. Compute firm output, firm profit and market output.
c. Is total welfare maximised in the Nash equilibrium? If not, suggest an outcome that would maximise total welfare, and compute the deadweight loss in the Nash equilibrium compared with your outcome.