The only producer of branded bottled water in the United States markets its produced under the label Nanton Water. Koala Juice (KJ) is the only brand available in Australia. Bottles of Nanton Water and KJ can be produced at a constant marginal cost of production equal to 4. Suppose that the two firms can stop arbitrage-third-party exports-between Australia and the United States. Let the demand curve for branded bottled water be given by P(Q) = 40- Q in each country.
(a) Assuming no trade, what are the prices of Nanton Water in the United States and KJ in Australia?
(b) If there is free trade (no transportation costs) so that both firms operate in each market what price applies in the markets?
(c) Contrast the no-trade and the trade outcome assuming no arbitrage: equilibrium prices, quantities, and profits. Which do consumers prefer?
(d) Suppose there are transportation costs of $3 per unit. Find the new trade equilibrium.
(e) Transportation costs are still $3. Suppose that the Australian government is considering the introduction of a $3 per unit tariff on Nanton Water. Would you recommend its enactment if you represented the maker of KJ? Consumers of KJ in Australia? The public interest in Australia? Does your response depend on whether or not the United States retaliates with an identical tariff on KJ? Why?