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 firms, Firm 1 an Firm 2, and that the demand curve in the industry is given by P = 100-Q1 -Q2 . If Firm 1 is the "experienced foreign firm" and Firm 2 is the "inexperienced infant firm", the argument goes that the experienced foreign firm 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 firm, which essentially increases that firm's costs in order to make the infant industry more competitive. To that end, suppose that TC(Q1) = (2+1)Q, and TC(Q2) =4Q2 . 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 firm's best response function. In this case, we have that MR1 = 100-2Q1 -Q2 ; MC1 =2+1 and MR2 = 100-Q1 -2Q2; MC 2 =4 Solve for each firm's best response. BR1: Q1 = 98 -1 _1Q2 2 2 BR2: Q2 =48- - Q 2 (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.) O Q1 =- 100 3 -, Profit for firm 1 = 1111.11 Q 2= 2, Profit for firm 2. = 981.78 OQ1 =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 = 94. Profit for firm ? 1111 11