Consider Firm X Belongs to Country a and Firm Y

question 21

Multiple Choice

Consider firm X belongs to country A and firm Y belongs to country B. Suppose that it is technologically feasible for both firms to produce good Z. Also assume that if they do, then they will be the only suppliers of good Z in the world. Now, both the firms have to decide simultaneously whether to produce good Z or not. Figure (a) shows the payoffs of both firms if their respective governments do not provide them with export subsidies. Figure (b) shows the payoffs when the government of country B grants an export subsidy to firm Y, but the government of country A does not. From Figure (a) , we can correctly infer that:

• A)it is optimal for firm X not to produce if firm Y does not produce.
• B)both firms can decide to produce since they can anticipate that the other firm will not produce.
• C)it is optimal for firm Y not to produce no matter what firm X does.
• D)both the firms will suffer losses if they produce simultaneously.

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