ProblemSet7bANSWERS - UBGA 118: International Trade Fall...

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UBGA 118: International Trade Fall 2008 Problem Set #7b ANSWERS (Due Thursday, November 6, 2008) 1. Dumping. Suppose that a firm acts as a monopolist in its domestic market. a. Use an appropriate diagram to clearly and accurately show the equilibrium price and quantity in the domestic market (before any international trade). b. Provide a brief economic explanation of what you have shown in your diagram above. A monopolist faces a downward sloping demand curve and a downward sloping marginal revenue curve. In order to maximize profits, the monopolist will expand production until marginal revenue equals marginal costs. Consequently, equilibrium for a monopolist is given by producing at Q M and charging P M . (I have shown constant marginal costs because that is stated in the next part of the question. However, if there were increasing marginal costs, the determination of equilibrium output and price is still the same: profit maximizing firms will equate marginal revenue with marginal costs.) MC D MR Q M Q P P M MC = MR
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c. Now assume that the firm enters the foreign market where it is also a monopolist, that it faces identical constant marginal costs of production in each market, and that it sells its product for a higher price in the domestic market than it does in the foreign market. Use an appropriate diagram to clearly and accurately show the monopolist’s equilibrium price and quantity in the domestic markets and its equilibrium price and quantity in the foreign market. d. Provide a brief economic explanation of what you have shown in your diagram above. The monopolist’s production and pricing decisions in the domestic market are given by Q M and P M . The monopolist’s production and pricing decisions in the foreign market are given by Q* M and P* M . Total production by the monopolist is given by Q
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ProblemSet7bANSWERS - UBGA 118: International Trade Fall...

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