A monopolist supplies an identical good in both countries. The inverse demand curve of Country A is P = 12 – Q and that of Country B is P = 22 – 2Q. Suppose the monopolist has plants in two countries and all plants have a constant marginal cost of $2. (a) Suppose the tariff is so high that there is no trade between the two countries, what price should the monopolist charge in each country? What is its total profit? (b) After the two countries sign a trade agreement, the tariff becomes zero. Now the good the monopolist supplies can be transported from one country to the other with a cost of one dollar per unit. How will the monopolist’s profit change if it does NOT change its pricing strategy? (c) How should the monopolist change its pricing strategy to maximize its profit?
A monopolist supplies an identical good in both countries. The inverse demand curve of Country A is P = 12 – Q and that of Country B is P = 22 – 2Q. Suppose the monopolist has plants in two countries and all plants have a constant marginal cost of $2.
(a) Suppose the tariff is so high that there is no trade between the two countries, what price should the monopolist charge in each country? What is its total profit?
(b) After the two countries sign a trade agreement, the tariff becomes zero. Now the good the monopolist supplies can be transported from one country to the other with a cost of one dollar per unit. How will the monopolist’s profit change if it does NOT change its pricing strategy?
(c) How should the monopolist change its pricing strategy to maximize its profit?
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