ECON20022 Question 3 (Please note that part a, b, and c are independent questions. Answer all parts) Part A [Word limit: 400] Consider a two-firm model with a negative production externality. Let x, denote firm i's output, with i = 1, 2. Suppose that two firms operate in two different competitive markets and each firm sells its product in its respective competitive market, at the prices p1 = 100 and p2 = 150, respectively, and that they face the same direct production cost ci (x1) = 2. Let e(x1, X2) = x1X2 be the external cost on firm 2's activity generated by the production of firm 1. a. Find each firm's best response function to the output set by the other firm and compute the Nash equilibrium assuming that firms choose their output non-cooperatively and independently. Illustrate the equilibrium in an appropriate graph. [10 marks] b. Calculate each firm's equilibrium profits and the total external cost imposed on firm 2. [5 marks]