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March 28, 2017

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Suppose there are two goods. The demand for good 1 is q1=a-bp1+ep2 and the demand for good two is q2=a-bp2+ep1.

a and b are strictly positive, |e|<b

(1)Compute the optimal prices, and the Lerner index and inverse elasticity of demand for each good.

(2)Now suppose the goods are produced by two firms that choose prices simultaneously. Compute the Nash equilibrium and compare it to the answer in part (1)

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