Consider Firm X Belongs to Country a and Firm Y

Multiple Choice

Consider firm X belongs to country A and firm Y belongs to country B. Suppose that it is technologically feasible for both firms to produce good Z. Also assume that if they do, then they will be the only suppliers of good Z in the world. Now, both the firms have to decide simultaneously whether to produce good Z or not. Figure (a) shows the payoffs of both firms if their respective governments do not provide them with export subsidies. Figure (b) shows the payoffs when the government of country B grants an export subsidy to firm Y, but the government of country A does not. From Figure (b) , the country B's government's decision to subsidize firm Y:

A) can be good for country B because firm X will decide not to produce.
B) will be good for country B only if government of country A decides to subsidize firm X.
C) can never lead to an optimal solution since firm X will surely produce.
D) will be suboptimal since it will lose its customers in country A.