Suppose that the annual demand for TV sets in Zirconia is P = 2000 - 2Q....

Suppose that the annual demand for TV sets in Zirconia is P = 2000 - 2Q.

a. Suppose that TV's R Us Corporation has the sole rights to import TV sets into the country of Zirconia. TRUC has no fixed costs. It can import TV's for a price of $150 per set and its additional costs of selling a TV amount to $50 per set.

If it wishes to maximize profits, how many TV sets should TRUC sell per year, what price should it charge, and what will be its annual profits? (Show your computations.)

b. Suppose that a World Bank/IMF mission persuades the country of Zirconia to abandon its import license scheme, so that any firm that wishes to do so can import and sell TV sets. Assume that TV's can be imported for a price of $150 per set and the additional costs of selling a TV amount to $50 per set. What do you expect to be the price of TV sets sold in Zirconia and what will be the annual quantity of sets bought and sold? (Explain your reasoning.)

Expert Solution

Suppose that the annual demand for TV sets in Zirconia is P = 2000 - 2Q.

a. TRUC has no fixed costs and is a monopolist currently. It can import TV's for a price of $150 per set and its additional costs of selling a TV amount to $50 per set. This makes marginal cost = $200 per set.

If it wishes to maximize profits, it must use MR = MC

From demand function, we have TR = 2000Q - 2Q^2 and MR = 2000 - 4Q.

2000 - 4Q = 200

Q = 1800/4 = 450 sets and price P = 2000 - 2*450 = $1100 per set. Annual profits = (P - ATC or MC)*Q = (1100 - 200)*450 = 405,000

b. Now any firm that wishes to do so can import and sell TV sets. Assume that TV's can be imported for a price of $150 per set and the additional costs of selling a TV amount to $50 per set. This makes the marginal cost again $200 per ser.

With competition, the market will turn perfectly competitive. Each seller will equate P = MC so the new quantity and price are

2000 - 2Q = 200

Q = 900 sets

Price = MC = $200 per set.

This is true because competition will reduce price and raise quantity untill the market reaches efficiency where P = MC. With free entry and exit, each firm in the long run will earn zero economic profit so that P = MC = AC.

Rahul Sunny answered 2 years ago

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