In the following payoff matrix, for two interdependent firms in duopoly:

In the following payoff mat
Produce Firm F DNP
$10 $0
Produce -$30 $100
Firm H
DNP $120 $0
$0 $0

My responses:

a) What will firm F do and what will Firm H do?

The only win condition for H is to manufacture and no production by Company F. If Company F is going to manufacture, they will have a win-win situation with company H having losses ($30MM)

b) Suppose a subsidy of $40 is given to Firm H. With everything else remaining the same, what would each firm do based on the subsidy? And what is the effect of the subsidy on the welfare in the home country?

Firm H will chose to produce as a subsidy always makes a profit guaranteed. Firm F will chose not to produce as they will experience a loss.

The following table shows the number of days of labor needed to produce 1 unit of machine and wheat in France and Germany:

Machine Wheat
France 100 days 4 days
Germany 60 days 3 days

My responses:

a) Calculate the autarky price ratios:

France= 1:M 100/4 and 1:W 4/100 or 25 machine hours to .04 wheat hours
Germany= 1: M 60/3 and 1:W 3/60 or 20 machine hours to .05 wheat hours

b) Which country has a comparative advantage in machine and which in wheat?

Germany has the comparative advantage in machine (less hours required to produce) and France in wheat.

c) In the terms of trade are 1 machine: 22 wheat how many days of labor does France save per unit of its import good by engaging in trade? 1.5 days

d) If the terms of trade are 1 machine: 24 wheat how many days of labor do France and Germany save to their import good? France: 1.6 days Germany 1.2 days

e) What can be said about the comparative distribution of gains from trade between France and Germany in part c and d? Why?

There is a savings to both countries which allows them to focus on their primary industry. This in turn will allow improvements and further time to produce reduction to be realized overtime.