Econ 355 Assignment 4

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Problem Set 4: 355

Q1) Tastes for Varieties and trade

1.

p = (Qn/1000p)^-1/2
pQ = Q^1/2 (n/1000p)^-1/2

MR = MC

1/2Q^-1/2 (n/1000p)^-1/2 = 1/2

Q = 1000p/n

p = (Qn/1000p0^-1/2 = 1

Zero profits in the long run means that AC = p

10/(1000/n) + 1/2 = p

Since the PP curve is flat and p = 1, then

10/(1000/n) +1/2 = 1

n = 50

2. The market size doubles, but there is still no change to the PP curve [p=1]

10/(2000/n) + 1/2 = 1

n = 100
3. The only gain from trade is the increase in the number of varieties available to each consumer as there is no decrease in price.

Q2) Infant Industry Argument

1.
DB = 10 - (1/2)p
DRow = 8 - (1/2)p

Then,

Dw = 10 - (1/2)p, when p > 16
Dw = DB + DRow = 10 - (1/2)p + 8 + (1/2)p
= 18 - p
= p = 18 - Dw

At equilibrium p = ACUS, that is

18 - DW = 15 - 1/2Q
3 = 1/2Q
Q = 6
pW = 12

2. When the US is serving the entire world market, Brazil cannot enter the market because its average cost is higher than the world price. [pic]

3. (a)
ACB1 = 15.5 - (1/2) QB
DB = 10 - (1/2)p --> p = 20 - 2DB

When p = AC, we have:

20 - 2DB = 15.5 - (1.2) QB
4.5 = 3/2 QB1
QB1 = 3
pB1 = 14

Thus, if ACB1 is the correct estimate of the average cost curve, pB1 = 14

b) When ACB2 is the correct estimate of the average cost curve, we have:

20 - 2DB = 15.5 - 3/5QB
2.5 = 7/5QB
QB2 = 3.2
pB2 = 13.6

(c) US only serves the rest of the world:
DRow = 8 - 1/2p --> p = 16-2DRow

Setting p = AC, we have:
16-2DRow = 15 - 1/2Q
1 = 3/2QRow
QRow = 2/3
pRow = 14.67

4.
a) If ACB1 is the correct estimate because pB1 = 14 < pRow = 14.67, consumers buy the product from Brazil. Brazil would serve the entire market, then we can derive the new world price pW as follows:

p = 18 - D = ACB1 = 15.5 -1/2QB
2.3 = 0.5Q
QW = 5
pW = 13 > 12 (1970)

Thus temporarily protecting the microchip industry is a bad policy as...
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