1. Consider a pharmaceutical industry with two producers, P zer and Roche. The former is based in the U.S. will the latter is based in E.U. If both produce they both get a pro t of -20. If one produces it gets a pro t of 300.

a) Describe this scenario in a game matrix.

b) Can the U.S. impose a welfare improving subsidy? If so, how large must it be?

Suppose that the U.S. government imposes the minimum subsidy required to keep Roche out of the market. However, Roche develops cost saving technology and gets a pro t of 200 when it produces alone.

c) Described the new scenario in a game matrix, including the U.S. subsidy.

d) Is the original U.S. subsidy welfare improving? Explain.

2. Consider two rms producing with marginal costs c1 and c2 and c1 < c2.

All xed costs are sunk.

a) Which rm is producing the highest quantity and making the highest prots?

b) How does free trade an ect each rm's demand curve? Show on a graph.

c) Which rm is more like to leave the market after free trade? Show on a graph.

d) In the presence of transportation costs, which rm is more likely to leave the market?