Firms 1 and 2 produce horizontally differentiated products. The demand for ?rm 1's product is given by the equation, Q1 = 100-P1 + P2/2.
The demand for ?rm 2's product is given by the equation,
Q2 = 200-4P2 + 2P1.
Firm 1's marginal cost is MC1 = $10, while ?rm 2's marginal cost is MC2 = $20. The two ?rms compete in Bertrand competition, by simultaneously selecting prices.
Question 1: What is the equation of ?rm 1's best-response function?
Question 2: What is the equation of ?rm 2's best-response function?
(All working out must be shown)