Question

Consider a competitive market served by many domestic and foreign firms. The domestic demand for these firms’ product is Q^d= 1300 - 2.5P.The supply function of the domestic firms is Q^SD=50 + 1.5P,while that of the foreign firms is Q^SF= 250.

Instructions:Enter your responses for equilibrium price rounded to the nearest penny (two decimal places). Enter your responses for equilibrium quantity rounded to one decimal place.

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

a. Given,

Domestic Demand, Qd = 1300 - 2.5P

Domestic Supply, Qsd = 50 + 1.5P

Supply from foreign firms, Qsf = 250

Total Supply, Qs = Qsd + Qsf = 50 + 1.5P + 250 = 300 + 1.5P

At equilibirum, Qs = Qd

=> 1300 - 2.5P = 300 + 1.5P

=> 1300 - 300 = 1.5P + 2.5P

=> 1000 = 4P

=> P = 1000/4 = 250

Therefore, Equilibrium price = $250

Equilibrium quantity = 1300 - 2.5P = 1300 - 2.5 x 250 = 675 units

b. Supply form foreign firms is constrained by a quota of 100 units

Therefore, Supply from foreign firms, Qsf = 100

Total Supply, Qs = Qsd + Qsf = 50 + 1.5P + 100 = 150 + 1.5P

At equilibrium, Qd = Qs

=> 1300 - 2.5P = 150 + 1.5P

=> 1300 - 150 = 1.5P + 2.5P

=> 1150 = 4P

=> P = 1150/4 = 287.5

Therefore, Equilibrium Price = $287.5

Equilibrium quantity = 1300 - 2.5P = 1300 - 2.5 x 287.5 = 581.2 units