Part One:
- Suppose that in a perfectly competitive scenario, a firm's cost function is given by the function C(Q) = 4Q + 6Q2. Industry analysis indicates that there is a 60% probability that the price market price will be $180 and a 40% probability that the market price will be $540. What is the expected market price? How much output should the firm produce in order to achieve maximum expected profits? Calculate the dollar amount of those expected profits. Show all your calculations very carefully.
Part Two:
Assume that you are an international industry analyst. You have been called to analyze the case of a competitive environment where both local and foreign firms compete. The local demand function has been found to be Qd = 2800-5P and the local supply function has been found to be Qs = 400+3P. Foreign firms are supplying 400 units.
What are the free trade equilibrium conditions (equilibrium price and equilibrium quantity)?
If there were to be an import quota of 200 units, then how would the equilibrium price and quantity change?
How would you say that the quota has affected the consumers and the local producers in this economy?