Consider a duopoly in which homogeneous consumers of mass 1 have unit demand. Their valuation for good i = 1, 2 is v({i}) = with 1 > 2. Marginal cost of production is assumed to be zero, and firms

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Consider a duopoly in which homogeneous consumers of mass 1 have unit demand. Their valuation for good i = 1, 2 is v({i}) = with 1 > 2. Marginal cost of production is assumed to be zero, and firms compete in prices. Calculate and draw the best-response function of each firm, then characterize the Nash equilibrium in the price setting game. (You can assume that consumers would choose good 1 when they are indifferent in two goods.)

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