Two airlines compete in prices. The can differentiate the product so that their respective demand functions look like

Qa=4000-25Pa+12Pb

Qb=3000-20PPa

AVCa=MCa=160

AVCb=MCb=180

profit functions are

 

a(Pa,Pb)=(Pa-160)(4000-25Pa+12Pb)

 

b(Pa,Pb)=(Pb-180)(3000-20Pb-10Pa

 

Reaction functions are

Pa=160+(6/25)Pb

Pb=165+(1/4)Pa

(2 points) Use this information to draw each firms reaction function. (Hint: let pA be on the horizontal axis and pB in the vertical axis)

(3 points) Find the Nash equilibrium choice of prices.