US Milk Co. and EU Milk Co. are milk producers. US Milk Co. produces in the United States while EU Milk Co. produces in Europe. Both firms sell very similar products (milk) to consumers around the world. Say that the demand curve for a tank (i.e. 50 litres) of milk is given by: = 700 2 where Q=qA +qB is the total number of 50-litre tanks of milk produced by US Milk Co. and EU Milk Co.; p is the price of each 50-litre of milk measured in $. Assume that the marginal cost of producing each tank of milk is $10 for US Milk Co. and $5 for EU Milk Co. The US is thinking of subsidising US Milk Co.'s production so that it can better compete with its European rival. i. (4 marks) Initially neither firm receives a subsidy. If both firms seek to maximise profit, how many 50-litre tanks of milk will each produce and what will their profits be? Illustrate the solution on a diagram. ii. (4 marks) The US Government pays US Milk Co. a subsidy of $5 for each 50-litre tank of milk it produces. Assume that the European Union does not retaliate. How many 2 50-litre tanks of milk will each firm produce now and what will their profits be? Draw the new solution on the same diagram. iii. (6 marks) Which firm gains and which firm loses from the subsidy? With the aid of diagrams, explain why. iv. (6 marks) Calculate the optimal subsidy that the US Government could provide to US Milk Co. That is, assuming Europe does not retaliate, calculate the subsidy that will maximise US Milk Co.'s profit.