7.2 Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of government intervention, the market has a Nash-

Cournot equilibrium. Suppose demand is linear, p = 1 - q1 - q2, and each firm’s marginal and average costs of production are constant at m.

Government 1 maximizes net national income (it does not care about transfers between the government and the firm, so it maximizes the firm’s profit net of the transfers). Show that Government 1’s optimal s results in its firm producing the Stackelberg leader quantity and the other firm producing the Stackelberg follower quantity in equilibrium. C