Consider a pharmaceutical industry with two producers, P zer and Roche. The former is based in the U.S. will the latter is based in E.U. If both produce they both get a pro t of -20. If one produces it gets a pro t of 300.
1. Explain this scenario in a game matrix.
2. Suppose that the U.S. government imposes the minimum subsidy required to keep Roche out of the market. However, Roche develops cost saving technology and gets a pro t of 200 when it produces alone. Can the U.S. impose a welfare improving subsidy? If so, how large must it be?
3. Described the new scenario in a game matrix, including the U.S. subsidy.
4. Discuss, Is the original U.S. subsidy welfare improving?
5. Determine the two rms producing with marginal costs c1 and c2 and c1 < c2. All xed costs are sunk.
a. Which rm is forming the highest quantity and making the highest pro ts?
b. Explain how does free trade a ect each rm's demand curve? Show on a graph.
c. Determine which rm is more like to leave the market after free trade? Show on a graph.
d. In the presence of transportation costs, which rm is more likely to leave the market?