2. Suppose the home country open up to free trade and a foreign competitor enters the market. Assume that the foreign firm has the same cost structure as the home firm (the monopoly from the previous question). The demand for its product is given by the inverse demand function: P = 120 −QD. The company’s costs are: T C = 20Q+ 200 and MC = $20 A) Derive the best response function for each firm (h-home and f-foreign) B) Find each firms’ output, the home market price, and each firms’ profit from the home market
2. Suppose the home country open up to free trade and a foreign competitor enters the market. Assume that
the foreign firm has the same cost structure as the home firm (the
A) Derive the best response function for each firm (h-home and f-foreign)
B) Find each firms’ output, the home market price, and each firms’ profit from the home market
3. Now, suppose that in addition to the home country opening up to free trade, the foreign country has also
opened up to free trade. As a result, both firms sell their product in both markets.
A) Find each firms’ overall output, market price in each market, and each firms’ overall profit
B) Explain what effect free trade has (relative to no trade) on the firms and consumers
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