Suppose there are only two firms, firm 1 and firm 2, in the market. They both choose a quantity to produce simultaneously. The market price is determined by the market demand: p = 130(Q1 +Q2) where Q1 is the output quantity of firm 1 and Q2 is the output quantity of firm 2. Firm 1's total cost of production is 10Q1 and firm 2's total cost of production is 10Q2. That is, both firms have a constant marginal cost of 10.

Task 1. What's firm 1's best response towards firm 2? Plot it with Firm 1's choice on the horizontal axis and firm 2's choice on the vertical axis. What's firm 2's best response toward firm 1? Plot it in the same figure. Clearly label which curve is which firm's best response towards the competitor.

Task 2. What's the Nash equilibrium? How much is the profit of firm 1 at the Nash equilibrium?

Task 4. What's the best way for the two firms to collude? That is, if they can collude, what quantities will each produce?