Consider a homogeneous goods industry where two firms operate and the linear demand is given by p(y1 +  y2 ) = a - b(y1 +  y2 ), where p is the market price, and y1 (y2) is the output produced by firm 1 (2). There are no costs for firm 1 or firm 2. A. Derive the best responses (reaction curve) for firm 1 and firm 2. Explain the term best response (reaction curve). Illustrate the best responses in a diagram B. For the case in (a) determine the Cournot equilibrium (Nash equilibrium in quantities) when firm 1 and firm 2 compete simultaneously in quantities. C. How large are firm 1’s and firm 2’s profits?

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