Consider the following Bertrand game involving two firms producing differentiated

products. Firms have no cost for production. Firm 1's demand is q1 = 1 - p1 + bp2,

where b>0. A symmetric equation holds for Firm 2's demand.

a. Solve the Nash equilibrium of the simultaneous pre-choice game.

b. Compute the firms' output and profits.

c. Represent the equilibrium on a best-response function diagram. Show how an

increase in b would change the equilibrium. Draw a representative isoprofit

curve for firm 1.