Two firms based in the home country and one firm based in a foreign country produce...

 

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Two firms based in the home country and one firm based in a foreign country produce the same homogenous good and export it to a third country. The importing country does not produce the goods. The foreign firm produces at the marginal cost of c*. The first home firm produces at the same marginal cost as the foreign firm, that is, c₁-c*; the second home firm produces at the marginal cost, c₂-ac₁(α>1). Assume that the demand in the third country is linear, and examine how the optimal home export tax or subsidy changes as a function of when the other countries are free traders. Show graphically and explain. Two firms based in the home country and one firm based in a foreign country produce the same homogenous good and export it to a third country. The importing country does not produce the goods. The foreign firm produces at the marginal cost of c*. The first home firm produces at the same marginal cost as the foreign firm, that is, c₁-c*; the second home firm produces at the marginal cost, c₂-ac₁(α>1). Assume that the demand in the third country is linear, and examine how the optimal home export tax or subsidy changes as a function of when the other countries are free traders. Show graphically and explain.