Assume a two-country duopoly market where each country, A and B, is represented by a national champion—firm a for Country A and firm b for Country B. Inverse demand is given by: P = 100 − Q and the marginal cost of each firm is ca = cb = 400.
a. Determine the equilibrium profit for each firm if there is no subsidy.
b. Determine the profit to each firm if Country A optimally subsidizes firm a.
c. Determine the profit to each firm if both Country A and Country B offer their champion firms the optimal subsidy derived in 1c.
d. In 1c above is the cost of the subsidy covered by the change in profit that results from the no-subsidy setting?
