Problem
Consider two countries. At date 1, the countries both have such high tariffs that there is no trade. Within each country, wages and employment are determined as in the monopoly-union model in Section 2.1.C. At date 2, all tariffs disappear. Now each union sets the wage in its country but each firm produces for both markets. Assume that in each country inverse demand is P(Q) = a - Q, where Q is the aggregate quantity on the market in that country. Let the production function for each firm be q = L, so that wages are the firm's only cost, and let the union's utility function be U(w, L) (w - w_0)L, where w_0 is the workers' alternative wage. Solve for the backwards-induction outcome at date 1. Now consider the following game at date 2. First, the two unions simultaneously choose wages, w_1 and w_2. Then the firms observe the wages and choose production levels for the domestic and foreign markets, denoted by h_i and e_i for the firm in country i. All of firm i's production occurs at home, so the total cost is w_i(h_i + e_i). Solve for the subgame-perfect outcome. Show that wages, employment, and profit (and therefore also the union's utility and consumer surplus) all increase when the tariffs disappear. See Huizinga (1989***) for other examples along these lines.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.