Exercise 2. Consider the Hotelling model with linear transport costs where two firms, 1 and 2, are located at the extreme points of the unit interval. There is a unit mass of consumers who are uniformly distributed over this interval. A consumer located at x [0;1] has utility r 72 p; if she buys one unit of product 1, or r 7 (1 x) py if she buys one unit of product 2. Consumers have unit demands; we assume that r is large enough so that each consumer buys one or the other product. 1. Initially, both firms produce at a constant marginal cost q. Com- pute the profit of the two firms at the Nash equilibrium of the pricing game. 2. Suppose that firm 1 has found a process innovation that decreases its cost from g to cog k, with k