1.What you have just constructed is what economists would call Firm X's reaction function.

Even though Firm X thought about the different choices Firm Y could make, Firm Y is not actually going to choose just any random level of output. In fact, Firm Y has its own reaction function, where it considers how best to respond to what it thinks Firm X is doing.

Because both firms have the same zero marginal cost the two reaction functions are symmetrical.

Price

(Th~s, Firm Y's reaction function looks the same, only with "X" and "Y" switched.)

Graph the two reaction functions. Do you notice any points that stand out? Describe why this point represents an equilibrium for both firms.