1. Two firms compete in a market for an undifferentiated product. Demand for this product is described by the following inverse demand function: P= 120-5(Q₁ +Q₂ ) and each firm has the same marginal cost of production, which is $60. You can assume each firm is a profit-maximizer.

A. Find firm 1's reaction function.

B. In equilibrium, what quantity will each firm supply?

C. What is the equilibrium price?

D. Your answers so far have are based on the firms acting competitively. Assume now that they decide to collude in setting their output.

i) Firms that collude act as if they are one firm. Given that information, what would be the new inverse demand function this "firm" faces?

ii) Find the new output that each firm would set in this situation.

iii) What price would the colluding firms charge to consumers?