Consider 2 firms who produce a different good, but each good is a close substitute to the other. They compete simultaneously in a Cournot fashion. Inverse demand functions are given by:

P₁ = 6 4q₁ 2q₂

P2 = 6 4q₂ 2q1

Firm 1 has a marginal cost MC₁ = 2 whereas firm 2 has a marginal cost MC₂ = 3.5. Firms have no fixed costs.

(a) (5 points) What is firm 1's best response to firm 2's strategy? What is firm 2's best response to firm 1's strategy?

(b) (5 points) Find the Cournot-Nash equilibrium quantities (q_*1, q_*2, prices (P_*1, P_*2), profits (_*1, _*2).