4 25 points A monopolistically competitive company assembles

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)

Solution

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.