HW2-Answer
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(2.1) Calculate the equilibrium number of firms in the US and European automobile markets without trade.
ECON 6032: International Trade and Multinationals
ECON 6032: International Trade and Multinationals
Prof. Larry Qiu
3. [not to submit] Review the graphic analysis of the lecture notes on monopolistic competition and trade. Also review the model with equilibrium calculation.
(2.2) PUS =17,100+150/7, or PUS ≈$17,121.43; PE =17,100+150/11, or PE ≈$17,113.64.
(2.3) 17,100 +150/nT =5,000,000,000nT/S+17,000, with S=300m+ 533m= 833 million. Thus, nT ≈18.04. The number of total automakers now is 18. The new price PT=17,100+ 150/18 = 17108.33.
ECON 6032: International Trade and Multinationals Answer Key to Assignment 2
Prof. LaSuppose consumers at Home have the following demand: 1
Q = (18 − P) × 10000 Where Q is the number of cars demanded in that country per month and P is the price per car in that country, in thousands of dollars. Assume that no one other than Citroen or VW can transport cars between the two countries, so it is possible for the price of cars in the two economies to be different. (a) Suppose initially that both economies are in autarky. What will be the price and
Answer:
MR = MC
50 − Q = 10
Q = 40
P
=
50
−
1 2
(40)
=
30
c. Calculate the Home firm’s profit. Answer:
2. Suppose that fixed costs for a firm in the automobile industry are $5 billion and that variable costs are equal to $17,000 per finished automobile. Because more firms increase competition in the market, the market price falls as more firms enter an automobile market, or specifically P=17,100+(150/n), where n represents the number of firms in a market. Assume that the initial size of the US and the European automobile markets are 300 million and 533 million people with each buying one car, respectively. That is, total automobile consumptions are 300 million cars and 533 million cars, respectively.
the quantity sold in each country? (b) Suppose that we now have free trade between the two economies. There is no
cost to transporting the cars across borders for either firm. Suppose that the two corporations set their quantities in each market simultaneously. For any given quantity ������������������ that Citroen expects VW to sell in the French market, find the profit-maximizing quantity ������������������ that Citroen will sell in the French market. Using your answer, draw Citroen’s reaction function for the French market. (c) Using logic parallel to (b), draw VW’s reaction function for the French market on the same diagram. (d) Assume that each firm correctly guessed how much the other will produce in each market. What will be the price charged and the quantity sold in each market? (e) Analyze diagrammatically the effect of trade on the profits of the two firms, on consumer welfare in the two countries, and on overall social welfare. Do the two countries benefit from trade? Does anyone lose from it?
[See lecture note]
Chapter 4
4. [Question 3 on page 62] Consider a model with two countries called France and Germany. France has one automaker, called Citroen. Germany has a competitor, called Volkswagen. Citroen can produce cars at a constant marginal cost of $1,000 each. VW can produce cars at a constant marginal cost of $2000 each. Within each country, the demand for cars is given by the same demand curve:
(2.4) The equilibrium price in the US after trade is 17108.33 while before trade is 17,121.43. They are different because in (2.3), with free trade, the number of automobile firms in the total market is 18; but in (2.2), without trade, the number of automobile firms in the U.S. market is only 11. An increase in the number of firms raises the competition among firms. As a result, each firm charges a lower price in (2.3) than in (2.2). Yes, consumers are better off. (a) Prices of cars fall in the US as well as Europe to $17108.33. Suppose the nominal wages of consumers haven’t change after trade, they are better off. (b) The variety of automobiles increases in both markets. In the United States, consumers were able to choose between 7 brands before free trade; now they can choose between 18. In Europe, consumers were able to choose between 11 brands before free trade; now they can also choose between 18 brands. So, because of a lower price of automobiles and an increase in the variety of automobiles, the consumers in the U.S. and Europe are be better off with free trade.
ECON 6032: International Trade and Multinationals
ECON 6032: International Trade and Multinationals
Prof. Larry Qiu
3. [not to submit] Review the graphic analysis of the lecture notes on monopolistic competition and trade. Also review the model with equilibrium calculation.
(2.2) PUS =17,100+150/7, or PUS ≈$17,121.43; PE =17,100+150/11, or PE ≈$17,113.64.
(2.3) 17,100 +150/nT =5,000,000,000nT/S+17,000, with S=300m+ 533m= 833 million. Thus, nT ≈18.04. The number of total automakers now is 18. The new price PT=17,100+ 150/18 = 17108.33.
ECON 6032: International Trade and Multinationals Answer Key to Assignment 2
Prof. LaSuppose consumers at Home have the following demand: 1
Q = (18 − P) × 10000 Where Q is the number of cars demanded in that country per month and P is the price per car in that country, in thousands of dollars. Assume that no one other than Citroen or VW can transport cars between the two countries, so it is possible for the price of cars in the two economies to be different. (a) Suppose initially that both economies are in autarky. What will be the price and
Answer:
MR = MC
50 − Q = 10
Q = 40
P
=
50
−
1 2
(40)
=
30
c. Calculate the Home firm’s profit. Answer:
2. Suppose that fixed costs for a firm in the automobile industry are $5 billion and that variable costs are equal to $17,000 per finished automobile. Because more firms increase competition in the market, the market price falls as more firms enter an automobile market, or specifically P=17,100+(150/n), where n represents the number of firms in a market. Assume that the initial size of the US and the European automobile markets are 300 million and 533 million people with each buying one car, respectively. That is, total automobile consumptions are 300 million cars and 533 million cars, respectively.
the quantity sold in each country? (b) Suppose that we now have free trade between the two economies. There is no
cost to transporting the cars across borders for either firm. Suppose that the two corporations set their quantities in each market simultaneously. For any given quantity ������������������ that Citroen expects VW to sell in the French market, find the profit-maximizing quantity ������������������ that Citroen will sell in the French market. Using your answer, draw Citroen’s reaction function for the French market. (c) Using logic parallel to (b), draw VW’s reaction function for the French market on the same diagram. (d) Assume that each firm correctly guessed how much the other will produce in each market. What will be the price charged and the quantity sold in each market? (e) Analyze diagrammatically the effect of trade on the profits of the two firms, on consumer welfare in the two countries, and on overall social welfare. Do the two countries benefit from trade? Does anyone lose from it?
[See lecture note]
Chapter 4
4. [Question 3 on page 62] Consider a model with two countries called France and Germany. France has one automaker, called Citroen. Germany has a competitor, called Volkswagen. Citroen can produce cars at a constant marginal cost of $1,000 each. VW can produce cars at a constant marginal cost of $2000 each. Within each country, the demand for cars is given by the same demand curve:
(2.4) The equilibrium price in the US after trade is 17108.33 while before trade is 17,121.43. They are different because in (2.3), with free trade, the number of automobile firms in the total market is 18; but in (2.2), without trade, the number of automobile firms in the U.S. market is only 11. An increase in the number of firms raises the competition among firms. As a result, each firm charges a lower price in (2.3) than in (2.2). Yes, consumers are better off. (a) Prices of cars fall in the US as well as Europe to $17108.33. Suppose the nominal wages of consumers haven’t change after trade, they are better off. (b) The variety of automobiles increases in both markets. In the United States, consumers were able to choose between 7 brands before free trade; now they can choose between 18. In Europe, consumers were able to choose between 11 brands before free trade; now they can also choose between 18 brands. So, because of a lower price of automobiles and an increase in the variety of automobiles, the consumers in the U.S. and Europe are be better off with free trade.
