In: Economics
Consider two countries: Home and Foreign. There is one high-tech firm in each country, and each firm produces high-speed trains for both domestic consumption and exporting. The high-tech firms in both countries have been operating businesses for decades without subsidy. However, they plan to produce a new model of high-speed train, and this new model requires a large amount of fixed cost, which is equivalent to 20 times of marginal cost. Each firm has asked its government to provide subsidy, which is amount to half of the fixed cost. Do you think the government should provide subsidy? Explain your reasoning.