Yuppietown has two food stores, La Boulangerie, which sells bread, and La Fromagerie, which sells cheese. It costs $1 to make a loaf of bread and $2 to make a pound of cheese. If La Boulangerie's price is P1dollars per loaf of bread and La Fromagerie's price is P2dollars per pound of cheese, their respective weekly sales, Q1thousand loaves of bread and Q2

Q1=10-P1-0.5P2Q2=12-0.5P1-P2

1. 1.1Find the two stores's best response rules, and find the Nash equilibrium prices in this
2. game.
3. 1.2Suppose that the two stores collude and set prices jointly to maximize the sum of their
4. profits. Find the joint profit-maximizing prices for the stores.
5. 1.3Provide a short intuitive explanation for the differences between the Nash equilibrium
6. prices and those that maximize the joint profit. Why is joint profit maximization not a Nash equilibrium?