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Assignment 7 M.Umair Khan 17u00450 Section B Q. 1

The document contains the solutions to multiple questions regarding international trade and firm behavior. For question 1, the summary is: A Brazilian steel monopolist would sell 5 million tons domestically at $8/ton, but with export access it would sell 10 million tons total at $5/ton worldwide. Domestically it would sell 4 million tons at $10/ton. Exporting at half the domestic price is not dumping and benefits US welfare. For question 2, the summary is: Without trade, the US auto market equilibrium is 3 firms and the EU market is 4 firms. With trade, the equilibrium for both markets is 5 firms, with sales per firm of 833,000,000 vehicles.

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340 views2 pages

Assignment 7 M.Umair Khan 17u00450 Section B Q. 1

The document contains the solutions to multiple questions regarding international trade and firm behavior. For question 1, the summary is: A Brazilian steel monopolist would sell 5 million tons domestically at $8/ton, but with export access it would sell 10 million tons total at $5/ton worldwide. Domestically it would sell 4 million tons at $10/ton. Exporting at half the domestic price is not dumping and benefits US welfare. For question 2, the summary is: Without trade, the US auto market equilibrium is 3 firms and the EU market is 4 firms. With trade, the equilibrium for both markets is 5 firms, with sales per firm of 833,000,000 vehicles.

Uploaded by

umair khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assignment 7

M.Umair Khan
17u00450
Section B
Q. 1

a. The figure above represents the demand and cost functions facing a Brazilian Steel producing monopolist.
If it were unable to export, and was constrained by its domestic market, what quantity would it sell at what
price?
Ans: It would sell 5 million tons at a price of $8/ton
b. Now the monopolist discovers that it can export as much as it likes of its steel at the world price of $5/ton.
How much steel will the monopolist sell, and at what minimum price?
Ans. It would sell 10 million tons at $5/ton
c. Given the opportunity to sell at world prices, the marginal (opportunity) cost of selling a ton domestically is
what?
Ans. $5/ton
d. While selling exports it would also maximize its domestic sales by equating its marginal (opportunity) cost
to its marginal revenue of $5. How much steel would the firm sell domestically, and at what price?
Ans. 4 million tons at $10/ton
e. The Brazilian firm is charging its foreign (U.S.) customers one half the price it is charging its domestic
customers. Is this good or bad for the real income or economic welfare of the United States? Is the
Brazilian firm engaged in dumping? Is this predatory behavior on the part of the Brazilian steel company?
Ans. Good. If you define dumping as selling abroad at a price lower than domestically then YES. If by
dumping it means selling below marginal cost then NO. NO this is not being done to capture market share
but get some extra profits which any self-respecting monopolistic would do.

Q. 2 Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital
equipment, and so on) 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 = 17,000 + (150/n), where n represents the number of firms in a market. Assume that
the initial size of the U.S. and the European automobile markets are 300 million and 533 million people,
respectively.

Page 1 of 2
Calculate the equilibrium number of firms in the U.S. and European automobile markets without
trade.
Ans. P=17,000 + (150/n) = 5,000,000,000 * (n/Sus) +17.0000 -> Sus=300,000,000 ->
16,67n=150/n -> n=3 in the US. For EU: 9,38n=150/n -> n=4.
So in equilibrium number of firms in US is 3 and in Europe it 4

} Calculate the equilibrium number of firms and sales per firm with trade.
17,000 + 150/n = 5,000,000,000n/S -> Sus,eu=833,000,0006n=150/n -> n=5
Equilibrium for both firms will be 5

Q. 3 Which of the following are potentially valid arguments for tariffs or export subsidies, and which are not
(explain your answers)?
a. "The more oil the United States imports, the higher the price of oil will go in the next world shortage."
YES This is a valid argument for import tax. It works like tax on foreign monopoly

b. "The growing exports of off-season fruit from Chile, which now accounts for 80 percent of the U.S. supply
of such produce, are contributing to sharply falling prices of these former luxury goods."
NO It is not a valid argument as US farmers are having unjustifiable costs by growing off-season fruit.
Importing would be a better option for them.

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