Using the information in the previous exercise, suppose that workers at firm 1 go on strike and demand a higher wage. To settle the dispute, managers at firm 1 increase wages paid to workers, so that the marginal cost of production at firm 1, c1 increases.

(a) What happens to firm 1’s reaction function? What happens to firm 2’s reaction function?

(b) What happens to each firm’s price as a result of the increase in costs at firm 1?

(c) What happens to market share and profits for each firm as a result of the increase in costs at firm 1?