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Vertical Foreign Direct Investment Use the two-country model of vertical FDI to answer the following questions. Assume thatau=5,as=1,bu=1,bs=10, wu1=10, ws1=20, wu2=2, ws2=30,b=0.35, and=0.2. What is

Vertical Foreign Direct Investment

Use the two-country model of vertical FDI to answer the following questions. Assume thatau=5,as=1,bu=1,bs=10, wu1=10, ws1=20, wu2=2, ws2=30,b=0.35, and=0.2.

What is the optimal firm structure?

A.Partial Fragmentation

B.Complete Fragmentation

C.HFDI

D.Export

2.Suppose economic development in country 2 increases the unskilled wage rate to wu2=4.

What is the optimal firm structure?

A.Partial Fragmentation

B.Complete Fragmentation

C.HFDI

D.Export

3.How large doesw2uneed to be for the firm to prefer exporting to other firms structures?

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