1 Tariffs and Quotas under Monopolistic Competition [50 points] Suppose bikes ar

Question

1 Tariffs and Quotas under Monopolistic Competition [50 points] Suppose bikes are produced by many international companies at world price PW, but there is only one Swiss company that produces them. Therefore, as in class, without trade the Swiss firm would be a monopolist at home. With trade on the other hand, since Switzerland is a relatively small country, its consumers would be able to import any number of bikes at the world price Pw I. Suppose the Swiss monopolist's marginal cost equals MC =-4 + Q. Therefore, he/she would be willing to supply up until the point where this cost equals the price and supply in Switzerland must equal Assume that Switzerland's demand is D=20-P Show that Switzerland's import demand is M=16-2-P

Explanation / Answer

monopoly profit is maxmised when MR=MC

MR=20-2Q and MC=-4+Q

MR=MC the. 20-2Q=-4+Q

Q=24/3=8 and P=12

And import demand=excess demand=demand -supply

Import demand=20-P-4-P=16-2P if P<12

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