Assume:

Two identical countries France (Home, h) and Germany (Foreign, f),

Three groups of firms: h, f and m

The cost structure is as followed:

o F: fixed cost at the firm level (F = 1,000),

o G: fixed cost at the plant level (G= 200),

o c: marginal cost, production cost per unit (c = 4),

o t: trade cost per unit shipped (t = 0.2).

a- Indicate the equation of the cost functions of the three types of firms.

Present briefly the theory of proximity/concentration trade-off.

b- Give the equation of the profit functions.

c- Find the value of production from which it becomes more profitable to

settle a multinational firm than exporting.