Free Response Question II (Krugman model) Suppose that the demand facing firms producing Golf clubs exhibits love of variety. That is, they face a downward sloping demand curve where the quantity they sell is decreasing in their own price and increasing in the average price. The quantity they sell is also increasing in the market size, denoted by S. The demand facing firm-i in either country is given by Qi = S [- b(P₁ - P)]. As was shown in class, this demand curve generates the following marginal revenue curve for a typical firm assuming all firms are symmetric (so that Q S/n): MR P 1/nb. The total cost of producing Golf clubs is given by = TC(Q) F+CQi where F is the fixed cost and C is the marginal cost. a) Write down the profit maximizing condition of a typical firm given the information above. {Hint the condition should give you an equation in two unknowns P and n.} b) Now write down the zero-profit condition of a typical firm. In this condition substitute out Q using the fact that since all firms are symmetric, Q = S/n, where S is the total sales in the market. c) Assume that the parameters for Home are as follows. SH = 160, b = 2, F=5, C=2. Compute the equilibrium values of n, P, and Q. d) Assume that the parameters for Foreign are as follows. SF = 90, b = 2, F = 5, C=2. Compute the equilibrium values of n, P, and Q for Foreign. e) Now suppose that Home and Foreign trade freely in Golf clubs. What are the equilibrium values of n, P, and Q in the integrated economy? Is trade welfare improving for consumers in both countries? Justify your answer.
Free Response Question II (Krugman model) Suppose that the demand facing firms producing Golf clubs exhibits love of variety. That is, they face a downward sloping demand curve where the quantity they sell is decreasing in their own price and increasing in the average price. The quantity they sell is also increasing in the market size, denoted by S. The demand facing firm-i in either country is given by Qi = S [- b(P₁ - P)]. As was shown in class, this demand curve generates the following marginal revenue curve for a typical firm assuming all firms are symmetric (so that Q S/n): MR P 1/nb. The total cost of producing Golf clubs is given by = TC(Q) F+CQi where F is the fixed cost and C is the marginal cost. a) Write down the profit maximizing condition of a typical firm given the information above. {Hint the condition should give you an equation in two unknowns P and n.} b) Now write down the zero-profit condition of a typical firm. In this condition substitute out Q using the fact that since all firms are symmetric, Q = S/n, where S is the total sales in the market. c) Assume that the parameters for Home are as follows. SH = 160, b = 2, F=5, C=2. Compute the equilibrium values of n, P, and Q. d) Assume that the parameters for Foreign are as follows. SF = 90, b = 2, F = 5, C=2. Compute the equilibrium values of n, P, and Q for Foreign. e) Now suppose that Home and Foreign trade freely in Golf clubs. What are the equilibrium values of n, P, and Q in the integrated economy? Is trade welfare improving for consumers in both countries? Justify your answer.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Free Response
Question II (Krugman model)
Suppose that the demand facing firms producing Golf clubs exhibits love of variety. That is, they face a
downward sloping demand curve where the quantity they sell is decreasing in their own price and increasing in
the average price. The quantity they sell is also increasing in the market size, denoted by S. The demand facing
firm-i in either country is given by Qi = S [- b(P₁ - P)]. As was shown in class, this demand curve
generates the following marginal revenue curve for a typical firm assuming all firms are symmetric (so that Q
S/n): MR P 1/nb. The total cost of producing Golf clubs is given by
=
TC(Q) F+CQi
where F is the fixed cost and C is the marginal cost.
a)
Write down the profit maximizing condition of a typical firm given the information above.
{Hint the condition should give you an equation in two unknowns P and n.}
b)
Now write down the zero-profit condition of a typical firm. In this condition substitute out Q
using the fact that since all firms are symmetric, Q = S/n, where S is the total sales in the market.
c)
Assume that the parameters for Home are as follows. SH = 160, b = 2, F=5, C=2. Compute
the equilibrium values of n, P, and Q.
d)
Assume that the parameters for Foreign are as follows. SF = 90, b = 2, F = 5, C=2. Compute
the equilibrium values of n, P, and Q for Foreign.
e)
Now suppose that Home and Foreign trade freely in Golf clubs. What are the equilibrium
values of n, P, and Q in the integrated economy? Is trade welfare improving for consumers in both
countries? Justify your answer.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2fc0ee15-0f91-464a-9c89-ff2e773a521f%2F4058ced3-377e-4355-a6a6-25f5ec3bcaa3%2Fbqz9yti_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Free Response
Question II (Krugman model)
Suppose that the demand facing firms producing Golf clubs exhibits love of variety. That is, they face a
downward sloping demand curve where the quantity they sell is decreasing in their own price and increasing in
the average price. The quantity they sell is also increasing in the market size, denoted by S. The demand facing
firm-i in either country is given by Qi = S [- b(P₁ - P)]. As was shown in class, this demand curve
generates the following marginal revenue curve for a typical firm assuming all firms are symmetric (so that Q
S/n): MR P 1/nb. The total cost of producing Golf clubs is given by
=
TC(Q) F+CQi
where F is the fixed cost and C is the marginal cost.
a)
Write down the profit maximizing condition of a typical firm given the information above.
{Hint the condition should give you an equation in two unknowns P and n.}
b)
Now write down the zero-profit condition of a typical firm. In this condition substitute out Q
using the fact that since all firms are symmetric, Q = S/n, where S is the total sales in the market.
c)
Assume that the parameters for Home are as follows. SH = 160, b = 2, F=5, C=2. Compute
the equilibrium values of n, P, and Q.
d)
Assume that the parameters for Foreign are as follows. SF = 90, b = 2, F = 5, C=2. Compute
the equilibrium values of n, P, and Q for Foreign.
e)
Now suppose that Home and Foreign trade freely in Golf clubs. What are the equilibrium
values of n, P, and Q in the integrated economy? Is trade welfare improving for consumers in both
countries? Justify your answer.
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