an (inverse) industry demand curve given by

P=100Y=100(y1 +y2),

and zero costs.

N0w let the two firms produce somewhat different goods, and define s as a similarity index of the two firms products, where s ranges from 1 (identical products) to 0 (completely different products, so neither has any effect on the market for the other). We now assume that

P1 =100y1 sy2 P2 =100sy1 y2. Assume quantity competition, meaning that each firm observes the quantity sold by the other firm and reacts to it, as in the Cournot model.

Assume s = 12 . Find and graph the firms reaction curves, and find the Nash-Cournot solution (i.e. the quantity produced by each firm, the price charged by each firm, and the profit earned by each firm).

What happens to the price, quantity, and profit of each firm as s approaches zero?

What happens to the price, quantity, and profit of each firm as s approaches 1?