Consider Firm X belongs to Country A and Firm Y belongs to Country B. Suppose it's 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 firms have to decide simultaneously whether to produce Good Z or not. Figure (a) shows the payoffs for 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 grant an export subsidy to Firm X. From Figure (b), the decision of Country B's government to subsidize Firm Y
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A. can never lead to an optimal solution since Firm X will surely produce.
B. will be good for Country B only if the government of Country A decides to subsidize Firm X.
C. will be suboptimal since it will lose its customers in Country A.
D. can be good for Country B because Firm X will decide not to produce.
Answer: D
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