In: Economics
Xteel is the sole steel seller in both Canada and USA. The steel is produced in Canada. The marketing department of Company Xsteel has collected the following information.
Production cost:
Total cost TC = 2000 + 2Q
Marginal cost MC = 2
Canada:
Market demand Q =180 – 2P
Marginal revenue MR = 90 – Q
USA:
Market demand Q =180 – 10P
Marginal revenue MR = 18 – Q/5,
where P is price of steel ($/ton) and Q is quantity of steel. Since the steel needs to ship from Canada to USA, the marginal cost of selling steel in USA becomes $2.5. Parallel trade is not allowed in Canada and USA.
b. Suppose that the government of USA imposes a tariff of $2.5 for each ton of steel imported. How will this tariff affect your answer in part (a)?
A) price strategy for Canada,
As a monopolist , using profit Maximizing condition Xsteel choose profit Maximizing quantity and respective price.
MR=MC
90-Q=2
Q=88
98=180-2p
P=82/2=41
Profit=(41-2)*98=39*98=3822
For USA,
Because there is additional transportation cost,so MC=2.5
MR=MC
18-q/5=2.5
Q/5=15.5
Q=77.5
77.5=180-10p
P=102.5/10=10.25
Profit=(10.25-2.5)*77.5=600.625
Aggregate profit=3822+600.625=4422.625
B)the equilibrium and strategy for Canada market will remain same.
As. 2.5 $ tariff will decrease US demand for Xsteel's steel.
New demand function,
Q=180-10(p+2.5)=180-10p-25=155-10p
MR=15.5- Q/5
MR=MC
15.5-Q/5=2.5
Q/5=12
Q=60
60=155-10p
P=95/10=9.5
PROFIT=(9.5-2.5)*60=420
Aggregate profit=3822+420=4242