2. (20 points) McDonalds (m) and Burger King (b) compete in hamburger market by selling imperfect substitutes. The demand equations are: $Q_m = 230 - 2p_m + p_b$ $Q_b = 230 - 2p_b + p_m$ Assume that marginal cost and average cost is 5 for both firms. a) From the equations, how can you tell these goods are substitutes? b) Suppose the firms compete by simultaneously choosing price. Find the best response function of each firm as a function of the other firm's price. c) Compute the equilibrium price and quantity for each firm.
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If an increase in the price of one good leads to an increase in the demand for the other good, then they are substitutes. Show more…
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