Part C: Horizontal FDI (55points total):

A firm based in Ireland produces and sells bicycles in Ireland and in England. The demand for bicycles in Ireland is given by:

P = 280-Q

where P is the Irish price and Q is the quantity sold in Ireland. The demand in England is given by:

P*= 400-Q*

where P* is the English price and Q*is the quantity in England. The cost of production in Ireland is Y^2 where Y is the quantity produced. The cost of production in England is Z^2. The cost of transportation is 20 per unit. There is a fixed cost of 8,000 which is incurred by all the active production sites

For the next 4questions, assume that the Irish firm produces all the bicycles in the home country and serves the British market via exports only.

12.(5 points) Write down the total revenue obtained from selling bicycles to the Irish and the British markets.

13.(5 points) Write down the total cost of production and trade for the Irish firm.

14.(5 points) Write down the total profit function for the U.S. firm and calculate the equilibrium quantity of bicycles produced and sold on the Irish and the British markets.

15.(5 points) Calculate the equilibrium price of a bicycle in Ireland, respectively in England. Then, calculate the total profit earned by the Irish firm. Now, assume that the firm is considering setting up production in England (while still keeping open the possibility of supplementing the British plant with production exported from the Irish plant).

16.(5 points) Write down the total revenue earned by the Irish multinational.Express this as a function of the quantities produced as exported by the two plants (i.e., Y, Z and X).

17.(5 points) Write down the total cost of production and trade associated with operating the two plants.

18.(10 points) Write down the profit function for the Irish MNC and solve for the equilibrium:

a)production in Ireland

b)production in England

c)exports from the Irish plant to the British plant

19.(5points) Continue the analysis of FDI by calculating the equilibrium:

a). price of bicycles in the Irish market

b). price of bicycles in the British market

c). total profit earned by the Irish MNC

Is FDI a better strategy than exports only to serve consumers in the British market?

20.(5 points) Why is it optimal for the Irish firm to produce more in the home country than it is demanded by Irish consumers and to export the production surplus to England?

21.(5points) Suppose that the English government is going to charge the Irish firm a flat fee in order to produce in England (i.e. this fee does not depend on how much the firm produces in England, but the firm can avoid it entirely by not producing at all there). How much would have to be for the firm to choose to only produce in Ireland and thus avoid the fee?