Strategic Trade Policy (Sec 13)

Question 1

After a long subsidies dispute between Airbus and Boeing concerning new aircrafts, the WTO
finally came to a decision on the issue. Describe what incentive the USA and the EU have to
give government assistance for the production of new aircrafts. Also, explain whether it is in
the interest of governments that such assistance is limited by the regime of the WTO or international agreements.

Answer 1

Answer in emails on tutorial 13 exercise 14

Question 2

Consider a Cournot duopoly consisting of a company in the home country (1) and a company
in the foreign country (2). Both companies produce a homogenous product and have a linear
(inverse) demand function 𝑝(𝑥1 + 𝑥2
) = 100 − 0,5(𝑥1 + 𝑥2). Assume both goods are exclusively sold in a third country. Consider the following cost structure with constant marginal
costs: 𝑐𝑖
(𝑥𝑖
) = 𝑓𝑖 + 10𝑥𝑖
, (𝑖 = 1,2). The domestic government wants to strengthen the domestic company’s competitive position. Therefore, it provides a production subsidy of 𝑠1 for each
unit produced.
a) Give the maximization problem of each company and derive the first-order conditions.
b) Derive the reaction functions for each company.
c) Derive the Nash equilibrium depending on 𝑠1.
d) What are the profits of each companies depending on 𝑠1?
e) Calculate the welfare-maximizing amount of subsidy that the domestic government should
provide.
f) Calculate the profits of each companies and the welfare in each country. Describe whether
this form of strategic trade policy welfare enhancing for the home country

Answer 2

Answers in emails on tutorial 13 exercise 15