Suppose the following:
(i) two countries each with demand for a homogeneous good given by P(Q) = 40 − Q.
(ii) in Country A there is one firm with a marginal cost of production of cA.
(iii) in Country B there are two firms, each with a marginal cost of production of cB.
(iv) competition in relevant markets is Cournot.
(a) Find for each country expressions for the equilibrium price and firm profits and quantity under the assumption that no trade between the two countries occurs.
(b) Now assume a state of free trade exists between the two countries. Derive expressions for each firm’s quantity supplied and Country A’s imports. [Hint: Show that the global demand curve is P(Q) = 40 − Q/2.] For what values of cA is Country A an importer? If cB = 10 and cA = 8, is the trade pattern globally efficient? For cA = 2 and cB = 10?
(c) Assume that cB = 10 and cA = 8. Which country would benefit by imposing a $2 per unit tariff on imports? By how much would total surplus increase? Who gains and who loses—and by how much?
