Question

1. Wolverine Sports is a monopolist producer of basketballs with the ability to price discriminate between its home market of Michigan and the foreign market of Ohio. Wolverine Sports has fixed costs of $1000 and a constant marginal cost of $20 per unit. In Michigan, it charges $110 for a basketball and sells 90 basketballs. In Ohio, it charges $90 and sells 35 basketballs. How can this information be used to make case that Michigan IS dumping basketballs in Ohio and to make the alternative case that Michigan IS NOT dumping basketballs in Ohio.

2. Both Samsung and Huawei are considering developing a smartwatch. Samsung expects to make $125 million from its smartwatch unless Huawei also develops a smartwatch, in which case it expects to make $70 million. If Samsung doesn’t develop a smartwatch it makes $90 million. Huawei expects to make $100 million from its smartwatch unless Samsung also develops a smartwatch, in which case it expects to make $60 million. If Huawei doesn’t develop a smartwatch it makes $80 million. Set up a payoff matrix and determine the two possible Nash equilibria under free market conditions.

3. Suppose the Chinese government decides to provide an R&D subsidy to Huawei of $40 million, what is the new Nash equilibrium? Next suppose that the South Korean government responds to the Chinese policy by providing Samsung with a matching subsidy, what is the new Nash equilibrium?

4. Assume consumers in China and South Korea do not buy smartwatches, so that consumer surplus is zero under all possibilities described in the previous question. Compare the welfare in China and in S. Korea before and after the dueling subsidies are implemented. Are China and S. Korea worse off or better off

Answer 1

1. Michigan IS dumping basketballs in Ohio because Michigan is charging lower price for exported good and sell same commodity at higher price domestically.

Dumping is an example of price discrimination. As we know price discrimination is practice of charging different customers different prices. The most common form of P.D in International Trade is dumping. Dumping is a pricing practice in which firm charge lower price for exported goods and sell same commodity at higher price domestically.