4. (25 points) A monopolistically competitive company assembles and installs sol
ID: 1148684 • Letter: 4
Question
4. (25 points) A monopolistically competitive company assembles and installs solar panels it imports at $10 per unit. All remaining costs of the company, denoted RC, is given by the following (where Q is a unit of solar panel): RC(Q) = 1,000+502 The demand faced by this company is given by P-500-300. a) 10 points) What is the optimal production level, Q, and what is the profit at Q (15 points) US announced on Jan 22, 2018 that, a tariff (tax) of 30% would be imposed on imported solar panels. (https://www.forbes.com/sites/davekeating/2018/01/23/trump-follows-europes-lead- with-Chinese-solar-panel-tariffs/#7d 7b055931 a8 Assuming demand stays the same, what would be the new Q* and (Q*)? (According to the article, various aspects of solar industry is going to be affected but for the purposes of this question, consider only the change in imported solar panel price)Explanation / Answer
a) Total cost for a typical firm is RC = 1000 + 10Q + 5Q^2. Each firm in the market equates MC with MR
MC is 10 + 10Q and MR is 500 - 60Q. Find Q*
500 - 60Q = 10 + 10Q
490 = 70Q
Q* = 7 and price P* = 500 - 30*7 = $290.
The profit for a typical firm is Revenue - cost
= 7*290 - (1000 + 10*7 + 5*(7^2)) = $715
b) When imports are charged a tariff of 30%, the new price for import is $10 + $10*30% = $13 per Q.
Total cost now is RCNew = 1000 + 13Q + 5Q^2.
MC is 13 + 10Q and MR is 500 - 60Q. Find Q*
500 - 60Q = 13 + 10Q
487 = 70Q
Q* = 6.957 and price P* = 500 - 30*6.957 = $291.29.
The profit for a typical firm is Revenue - cost
= 6.957*291.29 - (1000 + 10*6.957 + 5*(6.957^2)) = $715 (approx)
The tariff seems to be ineffective because the profits are unchanged.
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