3. Suppose an industry consists of two competitors that compete in prices. Firm 1 makes and sells product 1, rm 2 makes and sells product 2. The demand for each product is as follows: q1 = 255p1+2p2 9'2 = 255P1+2p1 The cost functions are C(qi) = 2 + q,; for i = 1, 2. a Are the goods produced by rms 1 and 2 homogenous or differentiated? Explain. - Find the best response functions for rms 1 and 2. o How does the price Firm 1 would want to set change with the price of Firm 2'? Explain economic intuition. o What is the Lerner index (price minus marginal cost relative to the price) for products 1 and 2? Do the rms have market power? Why doesn't the \"Bertrand paradox\" of no market power apply in this case