Let the demand curve for branded bottled water be given by P(Q) = 40 - Q. The only producer in the United States markets its product 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.
(a) Assuming no trade, what are the prices of Nanton Water in the United States and KJ in Australia?
(b) What is the maker of KJ's marginal revenue on the first unit that it sells in the United States?
(c) Contrast the no-trade and the trade outcome assuming no arbitrage: that is, find equilibrium prices, quantities, and profits. Which do consumers prefer? What kind of price discrimination is the trade equilibrium?
(d) Suppose there are transport costs of $3 per unit. Find the new trade equilibrium. 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?
(e) Suppose now that transport costs have risen to $16 per unit. Should the Australian government impose a $1 per unit tariff? Can you intuitively explain why your recommendation differs between (d) and (e)?