1. There are just two firms, 1 and 2, in the widget industry. They each produce widgets at a fixed cost of $1000 per month and have no variable costs. The respective monthly demand curves they face are

q1= 120 2p1+ p2

q2= 120 2p2+ p1

The firms engage in Bertrand competition.

(a)Find the Bertrand equilibrium in the simultaneous move game where the firms settheir prices at the same time. Find the firms' best response functions and draw themin a clearly labeled diagram. Then find the equilibrium values ofp1, p2and label thispoint B in your diagram. Find each firm's profit levels.

(b)Now answer question (a) for the sequential game in which firm 1 chooses its price first. Find the equilibrium values ofp1, p2and label this point S in your diagram. Findeach firm's profit levels. Explain the relationship between the profit levels in this caseas compared to the profits seen in part (a).