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PS9_Solutions

# PS9_Solutions - AEM 4150 PRICE ANALYSIS Fall 2008 Problem...

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AEM 4150 PRICE ANALYSIS Fall 2008 Problem Set #9 Suggested Solutions 1. Least cost method (a) the least cost method: blue lines. (b) No. Because at any distance, air is more expensive than truck or rail. 2. Market boundary. (a) Net price A = 6 - .5Y Net price B = 4 - .6(6 - Y) Equate and solve for Y: 6 - .5Y = 4 - .6(6-Y) 1.1Y = 5.6 Y* = 5.09 Net price at the boundary = 6 - .5 Y* = 4 - .6 (6-Y*) = 6-.5*5.09 = \$3.45 New market boundary = 509 miles from A, and P = \$3.45 (b) transfer cost (per unit of product) air Distance truck rail 0 1

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(c) See the yellow curve above. 3. Spatial equilibrium model and international trade Under free trade, algebraic solution for the initial trade equilibrium : United States China Q s us = 50P Q d us = 3000 – 200P Q s cn = 100P Q d cn = 1500 – 100P ED us = Q d us – Q s us = 3000 – 200P – 50P = 3000 – 250P ES cn = Q s cn - Q d cn = 100P – (1500 – 100P) = 200P - 1500 Initial trade equilibrium: ED us = ES cn 3000 – 250P = 200P - 1500 4500 = 450P
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PS9_Solutions - AEM 4150 PRICE ANALYSIS Fall 2008 Problem...

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