Question

Suppose there are two countries, each of whom have a demand for peanuts of Q D = 2000 − 1000p. Production of peanuts happens at a constant marginal cost of $0.50.

(a) Assume there are a large number of competitors in each country which ensuring that there is a competitive market. Will there be gains to trade?

(b) Now assume that each country has only one producer. Solve for the monopoly price, quantity, profits, and consumer surplus in each country when there is no trade.

(c) Continue to assume that there is only one producer in each country, but now allow that there is free trade and the producers in each country compete on quantity. Solve for the Cournot price, quantity, profits and consumer surplus. What are the gains to trade?

Answer 1

Profit is maximised when marginal revenue= marginal cost