Consider Ford's decision to sell cars in the Australian market. Given the distance between the US and Australia, trade costs are an important part of the cost of exporting cars to Australia. Thus, the CEO of Ford must weigh two options: (a) produce Ford cars in US plants and export to Australia i.e. export strategy, or (b) produce the cars in Australia for the local market i.e. FDI strategy. For concreteness, suppose that demand for Ford cars in both the US and Australia is the same: Q=80-2P where Q is output and P is the price. Assume that wherever Ford chooses to produce, it is a monopolist. The marginal cost of producing one unit of car, $16, is also the same in both countries. Suppose that setting up a subsidiary in Australia requires an additional fixed cost of amount F. Thus, profits from the FDI strategy are as follows: ProfitFDI = PQ(P) - MCx Q(P) - F On the other hand, producing in the US and exporting to Australia requires a per unit trade cost of 4. Note that there are no fixed costs involved in the export strategy, as Ford is expected to use existing US plants to produce cars for the Australian market. (a) Use the above information to write down the profit function for the export strateqv. ProfitEXP (b) Ford will choose FDlif ProfifD|MAx > PigfiExpMAx, where the MAX refers to maximized profits. For what values of the fixed cost, F, Will FDI be the profit maximizing choice? (c) Now suppose Australia imposes an import tariff which raises the per unit trade cost to 6. For any given fixed cost F, would Ford be more or less likely to consider FDI strategy given this change in policy? (d) Suppose you're helping the General Manager of Ford to design their FDI strategy and you have to give a brief response to your boss (not more than 2 lines). Given the change in Australia's tariff policy in part (c) and Australia's proximity to Asia, would you advise Ford to open its FDI plant in Korea or China instead of Australia to sell to Australian local market?