Consider the market for transistors, which are produced in Home by firm H and in Foreign by firm F. These are only two countries in the world. In either country, the demand curve for transistors is:
Q = 10 - P,
where Q is the number of transistors sold and P is the price consumers face. Both firm H and firm F produce at a constant marginal cost of $4 per transistor, and they compete as Cournot competitors.
(a) Compute the equilibrium under free trade and show it on a diagram with H's sales in the Home market on the horizontal axis and F's sales in the Home market on the vertical axis.
(b) Now, suppose that the Home country government imposes a $1 per transistor import tariff. Compute the new equilibrium, and show it on the same diagram as you have drawn for part (a).
(c) Analyze the welfare effect of the tariff in a diagram that shows the effect on Home consumer surplus, profit, and tariff revenue. Does it raise Home welfare? Does it successfully shift profits from the F firm to the H firm?