Question 1
Profit-maximizingCompany XYZ is the sole steel seller in both Country C and Country U. The steel is produced in Country C. The marketing departmentof Company XYZhas collected the following information.
Production cost:
Total costTC = XXXXXXXXXX2Q
Marginal costMC = 2
Country C:
Market demandQ =180 –2P
Marginal revenueMR = 90 –Q
Country U:
Market demandQ =180– 10P
Marginal revenueMR = 18– Q/5,
where P is priceof steel ($/ton) and Q is quantityofsteel.Since the steel needs to ship from Country C to Country U, the marginal cost of selling steel in Country U becomes $2.5.Parallel tradeis not allowed in Country C and Country U.
a.What should be the optimal pricing strategy of Company XYZ?What is the profit of Company XYC?
Suppose that the government of Country U imposes a tariff of $2.5 for each ton of steel imported. How will this tariff affect your answer in part (a)?
Question 2
Company A is a bookstore selling economic textbooks and company B is a bookstore selling mathematic textbooks. While company A owns a physical shop located inMongkok, company B operates on the internet. Therefore, company A has a fixed cost of $180,000 per year while company B has no fixed cost. Since company A has a physical shop, the publisher is willing to sell the textbooks to company A at a discounted price of $60 per copy. Company Bhas tobuy the textbooks at a price of $100 per copy from the publisher, however. There is no other cost in their operations.
Currently, both bookstores set the price of textbooks at $200 per copy. At this price, the quantity demanded and the price elasticity of demand for both textbooks are the same. Specifically, the quantity demanded is 2,000 copies per year for each textbook and the price elasticity of demand is -2.
a.What is the annual profit of company A?
b.What is the annual profit of company B?
c.To help improve profit, a business consultant suggests company A to reduce the textbook price by 10%. However, this consultant does not recommend company B to adopt the same discount strategy. Show that while this price discount strategy helps improve the profit of company A, this strategy reduces the profit of company B.
d.Based on your answer to part (c), briefly explain why discount pricing strategy is more common for products with the following two characteristics:(i)Price elasticity of demand is very elastic &(ii)Total cost consists of a large portion of fixed cost.
Question3
Economic activity in the United States increased at a stable speed over the first half of 2018. In this economic environment, economists worry that there might be large capital outflow from emerging markets in Asia to the United States.
a.The exchange rate of USD to Malaysian Ringgit decreased from XXXXXXXXXXUSD/Ringgit on 28 January 2018 to0.2459USD/Ringgit on 1 August 2018. With the help of a demand-supply diagram, briefly explain how did the capital outflow fromMalaysiato the United States lead to the depreciation of Malaysian Ringgit against USD?Please indicate the above exchange rates in your diagram.
b.Suppose that US investors sell a large amount of Ringgit denominated bonds and use the proceeds to buy US dollar. How will this event affect the price of Ringgit denominated bondsand hence interest rate in Malaysia? Illustrate your answer with ademand-supply diagram.
Question4
Country C is a steel exporting country. In value term, Country C’s exported steel represents about 80% of the GDP of Country C. All steel exported from Country C is exported to Country U. About 90% of the production in Country U uses steel from Country C. Country C also imports a largeamountof soybeans from Country U. In value term, Country C’s imported soybeans from Country U is equivalent of 80% of the GDP of Country C. Imported soybeans are sold directly to households in Country C.
a.Suppose thatCountry Ustops importing steel from Country Cin order toprotect its national security. If Country C does not retaliate, how will this ban on trade policy influence the equilibrium inflation rate and output in both Country C and Country U? Illustrate your answer with aggregate demand and aggregate supply diagrams relating inflation to output.
b. Supposethat Country C retaliatesbystopping importingsoybeansfrom Country U.How will thistrade war between Country C and Country U affectthe equilibrium inflation rate and output in bothcountries?Illustrate your answer with aggregate demand and aggregate supply diagrams relating inflation to output.