QUESTION 7-6 (SIMULATION) The ch07question06 simulation Excel file allows you to play with the reciprocal dumping model. There are two firms, A and B. In the reciprocal dumping model of chapter 9 it is assumed that both firms face the same marginal costs. The simulation is slightly more flexible in this respect as it allows for a difference in marginal costs. Firm A produces for the home market and firm B is situated abroad. Firm A therefore does not face transport costs while firm B does. Note that the transport costs are of the iceberg type. a. Why does firm B not offer its products on the home market even though its marginal production costs are lower? b. What options does firm B have to introduce its product on the home market of A? c. One of the options of firm B is to lobby for a road so that transport costs will decrease. What effect does a decrease in transport costs have on the quantities supplied and the price? d. Who gains and who loses from a decrease in transport costs? e. How does welfare of country A, of country B and total welfare change? Do you think building a road is attractive for the government of country A?Question 7.6 Baseline Simulation Figure 7.7 Reciprocal dumping model Exogenous variables Marginal costs firm A 3.0 3.0 14- Marginal costs firm B 2.0 2.0 12- Transport costs firm B 5.0 2.5 Elasticity of demand 1.0 1.0 10 - Endogenous variables 8 Price 7.5 6.7 Price Output firm A 4.5 3.7 6 . Output firm B (import) 0.0 1.7 4 Profit firm A 20.3 13.4 Profit firm B 0.0 2.8 2 Consumer surplus 10.1 14.2 0 2 4 6 8 10 12 14 Menu Reset Quantity :513 - Demand curve firm A - MR-curve firm A Horizontal line 51 11