1. Consider a country, called Home, with one domestic rm competing with n foreign rms.
All the rms sell a homogeneous product and the demand in Home is p = a - bY where Y = yd +nyf .The domestic cost of producing one unit is c and the foreign cost of producing one unit is cf . The foreign rm must also incur an international cost equal to t per unit in order to sell in Home.
(i) Write the prot functions for one domestic and for one foreign rm.
(ii) If all these rms compete in quantity (Cournot competition), derive the equilibrium quantity produced by the domestic rm, the quantity produced by each foreign rm, the equilibrium price, the prot of the domestic rm and the prot of one foreign rm.
(iii) What is the impact of an increase in the number of foreign rms on the quantity sold per rm? Is there a dierence between the domestic and a foreign rm? Does the total quantity sold by foreign rm rise or fall? Explain.
(iv) Suppose now that t changes, what is the impact on the quantity sold per rm and on the prot per rm? Is there a dierence between domestic and a foreign rm? Explain.
(v) Suppose domestic welfare is dened as W = CS + d, where CS is the consumer surplus and d is the domestic rm prot. What is the impact of an increase in t on the consumer surplus? Given your answer to (iv), what do you then expect the impact of an increase in t on domestic welfare? Explain.