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Two firms produce differentiated products and the demand is given by q1 = 8 - p1 + 1/ 3 p2; q2 = 8 - p2

Two firms produce differentiated products and the demand is given by

q1 = 8 - p1 + 1/ 3 p2; q2 = 8 - p2 + 1/3 p1

Both firms have constant marginal cost c = $2. They make simultaneous decisions on price.

a. Derive firm 1's best-response function.

b. Calculate the equilibrium prices, quantities and profits.

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