Question 3 Consider two firms that produce complementary goods. For example, each firm could be producing hot dogs and hot dog buns or printers and ink cartridges. Therefore, each firm's inverse demand function is decreasing in its own production and increasing in the production of the other firm. In particular, if q1 and q2 are the firms' production levels, then their per-period profits are given by v1(q1,q2) = (20 - q1+q2)q1 – 2q1^2 and 21(q1,q2) = (20 + q1- q2)q2 – 2q2^2
(a) (1 point) What are the best-response functions of each firm? (b) Find the Nash equilibrium of the game. What are the profit levels for each firm? (c) (1 points) Find a pair of production levels (q1,q2) that give higher profits for both firms than those obtained when using the Nash equilibrium production levels. (d) Suppose both firms play the infinitely repeated version of this game with discount factor € (0,1). What is the smallest discount factor € (0, 1) that supports the pair of production levels you found in (c) in the infinitely repeated game?