2 Subsidies in Strategic Trade Policy This question asks you to show that the optimal unilateral subsidy in the strategic trade policy setting is always positive. We will take the example of Boeing and Airbus used in lecture, with all the same parameters. 1. The EU. government's objective is to maximize domestic prots less the cost of the subsidy. Write down the E.U.'s maximization problem as a function of the chosen quantities of Airbus and Boeing, Q; and Q'g. Hint: see the lecture notes. 2. Substitute the price and the optimal quantities, given the E. U. subsidy, in the expression above to nd the EU. maximization problem as a function of 3A, a, b and 0. Assume the US. does not subsidize. Hint: see the lecture notes. 3. Differentiate the government objective with respect to 3A. Hint: use the product rule of differentiation. 4. Show that the optimal subsidy is positive (Hint: assume a > c and explain why this makes sense) . 5. Give the intuition for part 4