Question

Consider a competitive market served by many domestic and foreign firms. The domestic demand for these firms’ product is Q^d = 500 - 1.5P. The supply function of the domestic firms is Q^SD = 150 + 1P,while that of the foreign firms is Q^SF = 200.

a. Determine the equilibrium price and quantity under free trade.

Equilibrium price: $______

Equilibrium quantity: _______units


b. Determine the equilibrium price and quantity when foreign firms are constrained by a 100-unit quota.

Equilibrium price: $______

Equilibrium quantity: ______ units

Answer 1

Under free trade, equilibrium is determined by the consition that domestic demand=domestic supply+foreign supply

500 - 1.5P= 150 + 1P+200

Solving for P from above we get the equilibrium price P=150/2.5=60

At this price equilibrium quantity is Q=610 out of which domestic firms supply 410.

when foreign firms are constrained by a 100-unit quota foreign supply becomes QSF = 200.

Thus the equilibrium price is now given by  500 - 1.5P= 150 + 1P+100. Sloving for P we the equilibrium price P=100. At this price equilibrium quantity is Q=350 of which 250 is supplied by domestic firms.