Consider a duopoly with product differentiation in which the demand and cost functions are

q₁ = 88 - 4p₁ + 2p₂

C₁ = 10q₁

q₂ = 56 + 2p₁- 4p₂

C₂ = 8q₂

for firms I & II respectively.

Derive the price reaction functions for each firm on the assumption that each maximises its profits with respect to its own price. Determine the equilibrium values of price, quantity and profit for each firm. (200 words) (15 Marks)