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Consider a model with two countries, the US and Japan. The US has one film maker, called Kodak. Japan has a competitor company, called Fuji. Kodak can produce film at a constant marginal cost of $4 each. Fuji can produce film at a constant marginal cost of $8 each. Within each country, the demand for film is given by the same demand curve: P = 20 - 2*Q where Q is the number of film demanded in that country per month, and P is the price per film in that country. a) Suppose initially that both economies are in isolation. What will be the price and the quantity sold in each country? [Tip: The marginal revenue in each country is MR = 20 − 4*Q ]. b) Suppose that we now have free trade between the two economies. There is no cost to transporting the film across borders for either firm. Suppose that the two corporations set their quantities in each market simultaneously. For any given quantity qF that Kodak expects Fuji to sell in the US market, find the profit-maximizing quantity qK that Kodak will sell in the US market. Using your answer, draw Kodak's reaction function for the US market. [Tip: The marginal revenue of Kodak in the US is MR = 20 − 4*qK – 2*qF ]. c) Using logic parallel to (ii), draw Fuji's reaction function for the US market on the same diagram. [Tip: The marginal revenue of Fuji in the US is MR = 20 – 2*qK – 4*qF]. d) Assume that each firm correctly guesses how much the other will produce in each market. (Tip: find where the reaction curves cross). What will be the price charged and the quantity sold in the US market? e) What is the effect of trade on consumer surplus in the US?

Consider a model with two countries, the US and Japan. The US has one film maker, called Kodak. Japan has a competitor company, called Fuji. Kodak can produce film at a constant marginal cost of $4 each. Fuji can produce film at a constant marginal cost of $8 each. Within each country, the demand for film is given by the same demand curve: P = 20 - 2*Q where Q is the number of film demanded in that country per month, and P is the price per film in that country. a) Suppose initially that both economies are in isolation. What will be the price and the quantity sold in each country? [Tip: The marginal revenue in each country is MR = 20 − 4*Q ]. b) Suppose that we now have free trade between the two economies. There is no cost to transporting the film across borders for either firm. Suppose that the two corporations set their quantities in each market simultaneously. For any given quantity qF that Kodak expects Fuji to sell in the US market, find the profit-maximizing quantity qK that Kodak will sell in the US market. Using your answer, draw Kodak's reaction function for the US market. [Tip: The marginal revenue of Kodak in the US is MR = 20 − 4*qK – 2*qF ]. c) Using logic parallel to (ii), draw Fuji's reaction function for the US market on the same diagram. [Tip: The marginal revenue of Fuji in the US is MR = 20 – 2*qK – 4*qF]. d) Assume that each firm correctly guesses how much the other will produce in each market. (Tip: find where the reaction curves cross). What will be the price charged and the quantity sold in the US market? e) What is the effect of trade on consumer surplus in the US?

College Algebra (MindTap Course List)
College Algebra (MindTap Course List)
12th Edition
ISBN:9781305652231
Author:R. David Gustafson, Jeff Hughes
Publisher:R. David Gustafson, Jeff Hughes
Chapter6: Linear Systems
Section6.8: Linear Programming
Problem 5SC: If during the following year it is predicted that each comedy skit will generate 30 thousand and...
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Consider a model with two countries, the US and Japan. The US has one film maker, called Kodak. Japan has a competitor company, called Fuji. Kodak can produce film at a constant marginal cost of $4 each. Fuji can produce film at a constant marginal cost of $8 each. Within each country, the demand for film is given by the same demand curve: P = 20 - 2*Q where Q is the number of film demanded in that country per month, and P is the price per film in that country. a) Suppose initially that both economies are in isolation. What will be the price and the quantity sold in each country? [Tip: The marginal revenue in each country is MR = 20 − 4*Q ]. b) Suppose that we now have free trade between the two economies. There is no cost to transporting the film across borders for either firm. Suppose that the two corporations set their quantities in each market simultaneously. For any given quantity qF that Kodak expects Fuji to sell in the US market, find the profit-maximizing quantity qK that Kodak will sell in the US market. Using your answer, draw Kodak's reaction function for the US market. [Tip: The marginal revenue of Kodak in the US is MR = 20 − 4*qK – 2*qF ]. c) Using logic parallel to (ii), draw Fuji's reaction function for the US market on the same diagram. [Tip: The marginal revenue of Fuji in the US is MR = 20 – 2*qK – 4*qF]. d) Assume that each firm correctly guesses how much the other will produce in each market. (Tip: find where the reaction curves cross). What will be the price charged and the quantity sold in the US market? e) What is the effect of trade on consumer surplus in the US?
Transcribed Image Text:Consider a model with two countries, the US and Japan. The US has one film maker, called Kodak. Japan has a competitor company, called Fuji. Kodak can produce film at a constant marginal cost of $4 each. Fuji can produce film at a constant marginal cost of $8 each. Within each country, the demand for film is given by the same demand curve: P = 20 - 2*Q where Q is the number of film demanded in that country per month, and P is the price per film in that country. a) Suppose initially that both economies are in isolation. What will be the price and the quantity sold in each country? [Tip: The marginal revenue in each country is MR = 20 − 4*Q ]. b) Suppose that we now have free trade between the two economies. There is no cost to transporting the film across borders for either firm. Suppose that the two corporations set their quantities in each market simultaneously. For any given quantity qF that Kodak expects Fuji to sell in the US market, find the profit-maximizing quantity qK that Kodak will sell in the US market. Using your answer, draw Kodak's reaction function for the US market. [Tip: The marginal revenue of Kodak in the US is MR = 20 − 4*qK – 2*qF ]. c) Using logic parallel to (ii), draw Fuji's reaction function for the US market on the same diagram. [Tip: The marginal revenue of Fuji in the US is MR = 20 – 2*qK – 4*qF]. d) Assume that each firm correctly guesses how much the other will produce in each market. (Tip: find where the reaction curves cross). What will be the price charged and the quantity sold in the US market? e) What is the effect of trade on consumer surplus in the US?
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