Consider the following Bertrand game involving two firms producing differentiated products.

Firms have no costs of production. Firm 1's demand is

q1 = 1 p1 + bp2

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

a. Find the equilibrium of the simultaneous price game.

b. Compute the firm's outputs and profits.

c. Represent the equilibrium on a best-response function diagram. Show how an increase in b would change the equilibrium