Consider a market that has 2 firms (Firm X produces good X and firm Y produces good Y) that sell products that are horizontally differentiated (i.e., ice cream flavors, different class of cars, business and economy class airplane seats, etc.). The demand functions for each firm is, respectively,

Qx =100 - 2Px + Py

Qy = 100 - 2Py + Px

a) Does good X and Y follow the Law of Demand? Explain. (2 marks) b) Are good X and Y substitutes or complements? Explain.

b) Assuming a marginal cost of $20 (MC = 20), the best response functions of the two firms is,

Px = 15 + Py

Py = 15 + Px

c) What are the equilibrium prices (i.e., PX and PY ) in this market? Why are the best response functions upward sloping (i.e., as PX increases =) PY increases, or vice versa)? (6 marks)