Consider a market for two differentiated products. Demand for good 1 is given by

and demand for product 2 is

D1(p1,p2)=1304/3p1 +2/3p2

D2(p1,p2)=1304/3p2 +2/3p1

where p1 and p2 are the prices of good 1 and 2. The cost function for both products and any firm producing them is C(q) = 15q.

(a)Are the two goods complements or substitutes? Briefly explain why. What is the diversion ratio of this demand schedule?

(b) Suppose the two goods are produced by one firm. What are the optimal prices for the two goods? What is total profit for the firm? [Hint: Make sure the demand of each good enters the monopolist's profit function!]