Question

Foreign Direct Investment and Alternatives:Company G, a European firm specializing in luxury cars, is willing to penetrate the corresponding US market, currently monopolized by local firm S. Marginal production cost is the same for both companies, constant, and equal to $40 (hereafter, all prices and costs are in thousands). Transporting cars from the EU to the US costs $5 per car. Building a plant in the US requires a fixed cost equal to $550. The two companies’ products are differentiated and in case G enters the US market, there will be price-competition and each firm’s demand will be ?? = 100 − 2?? + ??, ?, ? = ?, ?, ? ≠ ?; Currently there is no US tariff on foreign luxury-car imports, but in its effort to maintain its dominant position in the US market, S hires a lobbying company to pressure for the imposition of a tariff t per imported car. The lobbying company offers two alternatives at the same cost: a campaign for a $10 or $15 tariff per imported car. a) Must S opt for lobbying and which one of the two tariffs should it target? Mathematical explanation. b) If consumers can lobby as well, should they fight against any tariff? Mathematical explanation

Answer 1