Question

In: Economics

Xteel is the sole steel seller in both Canada and USA. The steel is produced in...

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.

  1. What should be the optimal pricing strategy of Xteel? What is the profit of Xteel?                                               

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)?

Solutions

Expert Solution

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


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