Trade protectionism has always been a contentious political issue, and goes all the way back to Alexander Hamilton's argument for protecting "infant industries". Let's examine how such a trade protectionist policy may work: Suppose there are two rms, Firm 1 and Firm 2, and that the demand curve in the industry is given by P 2100 Q1- Q: , If Firm1 is the "experienced foreign rm" and Firm 2 is the "inexperienced infant rm", the argument goes that the experienced foreign rm will have had enough time to achieve lower costs of production. Hence, protecting the infant industry would amount to imposing a tariff of the foreign rm, which essentially increases that rm's costs in order to make the infant industry more competitive. To that end, suppose that illC(01) = (2 + ()01 and TC(Q2) = 402 . Notice that when there is no tariff (t=0), Firm 1 does in fact operate at lower costs than Firm 2. Let's analyze this scenario by beginning to solve for each rm's best response function. ln this case, we have that MR1=1DO2Q1Oz :MC1=2+E and MRE=1DO-Q1-2Q2: MC2=4 Solve for each rm's best response. 3913 Q1: LEEi '%Q2 892102=48%O1 0591;01:1oo%02 E;.I;'2:c32=1titi%Q1 O 591' Q1:4802 5.92- Q2248 Q1 0891.Q1=%-02 = 98! _ BR? 02 O1 2 QUESTION 5 (Trade Protectionist Question) In the presence of no tariff (t=0), what are equilibrium outputs and profits for each firm? (Hint: If you feel confident in your answer on the question , you can simply plug in t=0 into your answer there, as you've already solved for Nash equilibrium for any t.) 3 Q* = -, Profit for firm 1 = 1111.11 Q 2 = - 94, Profit for firm 2 = 981.78 O Q*1 =100, Profit for firm 1 = 1111.11 Q 2=94, Profit for firm 2 = 981.78 O Q 1 = 100, Profit for firm 1 = 981.78 Q 2=94, Profit for firm 2 = 1111.11 O Q* = 100 3 , Profit for firm 1 = 981.78 Q 2= 2, Profit for firm 2 = 1111.11 QUESTION 6 (Trade Protectionist Question) Suppose the government imposes a tariff of t=5. What will be the equilibrium output and profit for each firm? (Hint: If you feel confident in your answer on the previous questions, you can simply plug in t=5 into your answer there, as you've already solved for Nash equilibrium for any t.) O Q 1 = 33, Profit for Firm 1 = 1089 Q 2=30, Profit for Firm 2 = 900 O Q"1 =30, Profit for Firm 1 =900 Q 2=33, Profit for Firm 2 = 900 Q"1 =30, Profit for Firm 1 = 900 Q 2=33, Profit for Firm 2 = 1089 O Q 1 =30, Profit for Firm 1 = 1555 Q 2=33, Profit for Firm 2 = 1555