Industrial organization and international trade economists often assume Cournot behavior when analyzing global competition between oligopolists. Recently, economists have used Cournot models to examine the potential use of anti-free trade policies, such as tariffs and subsidies, for improving domestic welfare in markets where economies of scale are significant. Theses analyses sometimes indicate that domestic welfare can be increased by the adoption of restrictive trade policies.

(a) Using the Cournot framework, first consider a model with one domestic American firm, Boeing, one foreign firm, Airbus, and no government intervention. To simplify the analysis, we assume that the product is sold only in the domestic market. The foreign firm, therefore, produces only for export into the American market. The inverse demand in the American market is B A p 100 q q . For both firms, MC=AVC=10 and the fixed cost is 500. In Cournot equilibrium, how much is each firm producing? How much profit do they earn individually and in total? How much is the American consumer surplus and social welfare?

(b) Suppose the United States grants a subsidy, s, of 3 per unit to Boeing. How do the Cournot equilibrium outputs and profits change? Are the American consumers and the United States better off as a result of this subsidy?

(c) Without government intervention, suppose Boeing, as the domestic airline, has the advantage to choose its output level first. How do the equilibrium output and profit for each firm change compared to the case in (a)? What happens to the consumer welfare and the total welfare for the entire domestic market?

(d) Without government intervention, if both firms set prices at the same time, what is the equilibrium price, output level, and profit for each firm? How about the consumer surplus and social welfare?