Use a diagram with reaction functions as in Figure 5.4 when actions are strategic substitutes. Notice that when firm 1’s strategy s1 is on the horizontal axis, its reaction function R 1

is steeper than firm 2’s reaction function R 2

. Identify the Nash equilibrium and label it N, and label firm 1’s (firm 2’s) Nash equilibrium strategy as

(a) Suppose firm 2 adopts a strategy Identify firm 1’s best-response to and label it

(b) Is firm 2’s best response to Why or why not? If not, would firm 2 rather increase or decrease