rofit-maximizing Company XYZ is the sole steel seller in both Country C and Country U.The steel is produced in Country C.The marketing department of Company XYZ has collected the following information.

Production cost:

Total costTC = 2000 + 2Q

Marginal costMC = 2

Country C:

Market demandQ =180 - 2P

Marginal revenueMR = 90 - Q

Country U:

Market demandQ =180 - 10P

Marginal revenueMR = 18 - Q/5,

where P is price of steel ($/ton) and Q is quantity of steel.Since the steel needs to ship from Country C to Country U, the marginal cost of selling steel in Country U becomes $2.5. Parallel trade is not allowed in Country C and Country U.

a.What should be the optimal pricing strategy of Company XYZ? What is the profit of Company XYC?

b.Suppose that the government of Country U imposes a tariff of $2.5 for each ton of steel imported.How will this tariff affect your answer in part (a)?