In the previous problem, suppose that we increase the size of Foreign by multiplying the Foreign demand and supply curves all by the same large number.
(a) Recalling the discussion of tariffs and small countries in Chapter 7, what will the Nash equilibrium look like now? (Answer qualitatively; describe the characteristics of the Nash equilibrium, not the exact value of the tariffs. No new computation is necessary.)
(b) If we move from the Nash equilibrium to free trade, will social welfare in both countries rise? Why or why not?
(c) Given your answers above, are small countries or large countries likely to be more interested in pursuing negotiated free trade?