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Q1. Michael Porter mentions two strategy options for competing: the differentiation approach and the cost leadership approach.

a) The differentiation approach implicates competing by having a superior product. Relate this approach to the monopolistically competitive model by using an appropriate diagram. Justify your answer in less than 80 words.

b) The cost leadership approach implicates competing by having a lower cost than one's competitors.

Q2. Suppose the firms compete on price rather than quantity. That is, quantity demanded is given by Q= a-p where p is price consumers face. After firm 1's selection of the level of advertising the firms simultaneously and independently select prices p1 and p2. The firm with the lowest price obtains all of the market demand at this price. If the firms charge the same price, then the market demand is split equally between them. Find the subgame perfect equilibrium of this game and explain why firm 1 advertises at the level you compute?

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