PROBLEM N1 Cabral 814 Suppose a given countrys domestic mark

PROBLEM N1 (Cabral 8.14) Suppose a given country\'s domestic market is supplied by two firms competing a la Cournot: Firm 1, a domestic firm, and Firm 2, a foreign firm. Demand is given by P) 12 - Q, where Q is total output, and marginal costs by c? and c2, where we assume c12 (i 1,2). Suppose that the domestic government levies an import tariff t to be paid by firm 2 for every unit sold in the domestic market. () Determine the equilibrium values of gi for a given value of t. b Show that a small import tariff increases domestic welfare, uhich is defined as the sum of c Show that, the more efficient the foreign firm, the greater the increase in domestic welfare from d) Show that, ifc is not very different from c2, then a small import tariff decreases world welfare, (e) In light of the above results, what can be an important role of the World Trade Organization consumer surplus, the domestic firm\'s profit, and import revenues an import tariff. Discuss which is equal to the sum of consumer surplus and profits of both firms (WTO)?

Solution

<p>A) 2007: MV = PY (equation of exchange), where P = ?, M = 1000, V = 8, and Y = 12,000.<br />1000*8 = 12,000*P</p>
<p>Therefore P = 8,000/12,000 = 2/3 = 0.67 (Price level 2007)</p>
<p>2008: MV = PY (equation of exchange), where P =?, M = 1050, V = 8, and Y = 12,000.</p>
<p>1050*8 = 12,000*P</p>
<p>Therefore, P = 8,400/12,000 = 0.70 (Price level 2008)</p>
<p>Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.7 / 0.67 = 11.67%</p>
<p>B) 2007: Remains the same as in A.</p>
<p>2008: MV = PY (equation of exchange) , where P= ?, M = 1,100, V = 8, and Y = 12,000.</p>
<p>1,100*8 = 12,000*P</p>
<p>Therefore, P = 8,800/12,000 = 0.73 (Price level 2008)</p>
<p>Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.73 / 0.67 = 12.22%</p>
<p>C) 2007: Remains the same as in A.</p>
<p>2008: MV = PY (equation of exchange) , where P= ?, M = 1,100, V = 8, and Y = 12,600.</p>
<p>1,100*8 = 12,600*P</p>
<p>Therefore, P = 8,800 / 12,600 = 0.70 (Price level 2008)</p>
<p>Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.70 / 0.67