Consider Krugman's duopoly framework. To start with, label the horizontal as "X": this axis will represent the home firm's sales of good X. Also label the vertical axis as "X*": this axis will represent the foreign firm's sales of good X.
Graph the following curves by clicking here
a.
Draw in the home firm's reaction function, and label it "H." Why is it downward-sloping?
b.
Draw in the foreign firm's reaction function, and label it "F." Make sure that this reaction function is flatter than the home firm's.
d.
Suppose
now that the home firm reduces its import tariff on this product. What
will happen to the home and foreign firms' reaction functions? Label the
new home firm reaction function H and the new foreign firm reaction function
F. Why will the reaction functions move in this way?
