Lecture 5 - Isabelle MEJEAN's home page
Lecture 5 - Isabelle MEJEAN's home page
Lecture 5 - Isabelle MEJEAN's home page
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Betts & Devereux (1996)<br />
Campa & Goldberg (2006)<br />
Firms’ behaviour<br />
LCP firms solve the following program:<br />
⎧<br />
⎪⎨<br />
⎪⎩<br />
max p(i),q(i) π LCP (i) = p(i)c(i) + eq(i)c ∗ (i) − W A (c(i) + c∗ (i)<br />
( ) −σ<br />
s.t. c(i) = p(i)<br />
P nC<br />
( ) −σ<br />
c ∗ (i) = q(i)<br />
P (1 − n)C<br />
∗<br />
∗<br />
Optimal prices are thus given by:<br />
p(i) =<br />
q(i) =<br />
σ W<br />
σ − 1 A<br />
σ W<br />
σ − 1 Ae<br />
Under flexible prices, the law of one price holds: p(i) = eq(i).<br />
<strong>Isabelle</strong> Méjean <strong>Lecture</strong> 5
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