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Consider a Japanese firm that sells product Y in the local market and contemplates sales to the US. If the Japanese firm enters the American market it will compete in quantities against a US firm already in the market. The inverse demand for Y in the US is = 250 (all prices and costs in this problem are in $US), where = + , is total quantity eventually sold byMASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION 2 the two competitors. The production of Y requires operating a plant at a fixed cost = 300, as well as 1 unit of labor and 1 unit of capital per unit of output. Currently, at both the US and Japan the cost of capital is $15/unit and that of labor $10/unit. The Japanese firm has the option to either invest directly in operating a plant in the US, or use at no extra fixed cost its already existing plant in Japan, shipping its product to the US. In that case a transportation cost of $10/unit has to be paid on top of any production cost; also, American customs require a $5/unit duty for any Y imports. a. Find the price of Y in the US, the profits of the American and the Japanese firm and total labor income in the Y sector in the US. (Mark: 1.0) b. Political pressure by unions in the US results in a new wage of $25/unit. Repeat the above calculations in the new situation. (Mark: 1.5) c. Assuming that half of the workers initially employed in the American Y sector were unionized and that non-unionized workers are the first to be laid off, show and explain the effect of the wage increase in unionized and non-unionized workers income. (Mark: 1.0)

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