Suppose a market is initially closed to trade. The market has 2 domestic pro- du

Question

Suppose a market is initially closed to trade. The market has 2 domestic pro- ducers: Randall who has a cost function C(gi)- + 5 and Lladnar who has a C(g) = g 2ge+ 10. The market is characterized by the inverse demand P(Q) = 200-Q 1. Suppose the market opens to trade with a Brazilian producer Randallinho where the price of the imported good is nv = $5. What is the new consumer surplus,new profits for domestic producers and change in total surplus after trade? How much is imported? Answer: To solve this we need to find aggregate supply (and hence indi- vidual supply for each firm). We get this fron the P = MC condition which means: From here, we can solve for the equilibrium allocation and price that would be found in perfeet competition and hence consumer surplus &profits; in perfect competition 3P-4 -200-P800-4P-3P-4 804 596 Consumer surplus is Cs-,))-3624.65 and profits for each firm can be found by find each individual firm qtuantity: g.- & 92 which means T-2()2-5-1614.02 and T2 - . (2-2(-10-317418. Thus total surplus is TSoLD +12-CS With trade, we get that the price is now Pw $5so that the quantity sold to consumers is now 5-200-Q Q = 195·Now consumer surplus is cs-(195)-19012.5 New output fr drnestic producers is 91-i k Thus new profits for each firn are =af)-1f7-5=-1.875 and ,-5(3)-(-2G)-10-7.75. The new total surplus is the same as above except with our new calculations which means the change in welfare is 10560.25. Imports are the difference between domestic demand and domestic supply which is 1M-195-Y

Explanation / Answer

Q1 = 804/28 comes under the

Q1 and Q2 equation in the above diagram

And solving it we get the solution.

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