(22 points) Suppose it is costly to transport exports. Let this cost be equal to some number T per unit. We are going to investigate some features of how the presence of T impacts the monopolistic competition model with trade. Assume all firms are the same in each country, and that each country is the same size. The problem is written to help guide you to the solution in a series of (hopefully) not too demanding steps. (Most of these steps I sort of do for you.)

A) Let Phh be the price a home firm charges in the home country, Phf be the price a home firm charges in the foreign country, Pfh be the price a foreign firm charges in the home country, and Pff be the price a foreign firm charges in the foreign country.

B) Also adopt notation where Xhh is the quantity of beer a home country sells at home, with other Xs defined the same way.

C) (4 points) A firm considering the prices to charge in each market will evaluate each market separately, since the trade cost introduces a friction that makes each market imperfectly integrated. When we had no transaction costs, we found in lecture that . The term equalled 1/n since we had total symmetry, which was nice. Since firms now need to charge different prices in each country, this new asymmetry will not allow for the same simplification here. Write out four MR relationships. For instance, MRhh will be

D) (4 points) Set the MRs equal to MC. Note that when a firm is exporting, the MC=C+T.

E) (4 points) Calculate the Markup over MCs for the Home firm in both markets. For instance,

F) (4 points) Will the markup be larger for the home firm when selling at home or foreign? Why? [Hint: Think about what will happen to its market share in foreign now that it has to pay a transportation cost.]

G) (2 points) Given your answer to g, write down an inequality relating how the value Phh compares to the Phf minus transport costs.

H) (4 points) The result for g describes a phenomenon called "dumping." The price charged by the home country firm in the foreign market, minus the cost of transport, is actually lower than the price the firm charges at home. "Dumping" is frowned upon by many governments. Suggest a couple reasons why. As an economist, what is your view?

Suppose the Beer industry (good X) is characterized by Monopolistic Competition in both the Home and Foreign country. The different producers offer differentiated products based on the tastes of their beer. Otherwise, the beer producers are in all ways identical. They each face a linear demand curve of the type described in Lesson 8: for any firm i. Fixed Costs are F=$10M, Marginal costs are constant C=$20 per keg. b=.01. The size of the home market is 10M kegs, and foreign is 25M kegs. [Review your Lesson 8 notes/videos for details on the terms of the equation in addition to how to solve the problem.]

How many firms will produce in the home market in autarky? How much output for each firm? What is the price per keg of beer? How many firms will produce in the foreign market in autarky? How much output for each firm? What is the price per keg of beer? (If your answer is not a round number, round DOWN to get n. Fractions of a firm don't make sense.) Why should we only round n down in problems like this rather than follow conventional rounding rules? Explain in a short paragraph. How many firms will produce in equilibrium when the countries open for trade? How much output for each firm? What is the price per keg of beer?

the quantity of customers served by Matt - the customer demand function for Matt's restaurant - was QM = 44 - 2PM + PS and the quantity of customers served by Sean was QS = 44 - 2PS + PM. The profits for each restaurant also depend on the cost of serving each customer. Suppose that Matt is able to reduce his costs to just $2 per customer by eliminating the wait staff. Suppose that Sean continues to incur a cost of $8 per customer.

a.) What is Sean's profit function, S?

b.) What is Matt's profit function (revenue per customer multiplied by number of customers), M?

c) Sean needs to choose his price to maximize his profit function. What is Sean's best response function?

d) Matt needs to choose his price to maximize his profit function. What is Matt's best response function? Explain what this best response function means.

e) Calculate the Nash equilibrium

f) Graph the two best response functions and indicate the location of the Nash equilibrium on the graph. To match what we did in class, plot Matt's price on the vertical axis and Sona's price on the horizontal axis.

g) Look at the graph of the best response functions that we came up with in class when the cost per consumer was $8 for both Matt and Sean. Indicate which best response function in your new graph has moved and by how much. Explain why these changes occurred in your graph.

Suppose that there are two food stores in town. La Boulangerie sells bread and La Fromagerie sells cheese. It costs $1 to make a loaf of bread and $2 to make a pound of cheese. If La Boulangerie's price is PB dollars per loaf of bread and La Fromagerie's price is PF dollars per pound of cheese, their respective weekly sales, QB thousand loaves of bread and QF thousand pounds of cheese, are given by the following equations:

QB = 14 - PB - 0.5PF

QF = 19 - 0.5PB - PF

a.) What are profit functions for La Boulangerie, B, and La Fromagerie, F?

b.) What are the best response functions in terms of setting the prices for La Boulangerie and La Fromagerie?

c.) Graph the respective best-response functions. Plot La Boulangerie's price on the vertical axis and La Fromagerie's price on the horizontal axis.

d.) Calculate the Nash equilibrium

Rather than setting their prices independently, suppose now that the two stores collude to set prices jointly so as to maximize the sum of their profits. Over the next few questions, we are going to find the joint profit maximizing prices for the stores.

e.) Start by identifying the profit function that captures the sum of the profits for the two stores i.e. J = B + F.

f.) What price should the two stores set for La Boulangerie? In other words, what PB maximizes the joint profit function? This looks a little trickier because the joint profit function, if you've calculated it correctly, has two squared terms in it instead of one. Think about it this way, though. Recall that the generic quadratic equation looks like y = ax2 + bx + c. In this part of the question, the x we're interested in is PB. Any term in our joint profit function that doesn't have some kind of PB in it is just part of the constant, 'c'. The 'x' that maximizes 'y' is still -b/2a. With this in mind, what is the best response function for the price set by La Boulangerie, PB?

[10:40 PM, 10/13/2022] fridahkathambi71: Suppose that there are three states of the world, a, b, and c. The probabilities of the three states are 1 = 0.25, 2 = 0.5, and 3 = 0.25. Let A, B, and C denote the Arrow-Debreu securities that pay $1 in states a, b, and c, respectively. That is, A = (1,0,0), B = (0,1,0) and C = (0,0,1). Let pA = 0.4, pB = 0.5 and pC = 0.2 denote the prices of A, B, and C.

Consider a security X which is worth $2 in state a, $3 in state b, and $1 in state c. If there are liquid markets for A, B, C and X, what is the price of X? [10:40 PM, 10/13/2022] fridahkathambi71: An insurance company offered drivers auto insurance. Assume that claims by safe drivers cost the insurer $1,000 over the term of the policy and claims by reckless drivers costs $5,000. Drivers know whether they are safe or reckless, but the insurer only know that 10% of drivers are reckless.

a. What is the expected cost of losses to the insurance company? b. How much does the insurance company have to charge for auto insurance to break-even? Why?

Ramsey model, COVID-19 shocks. Government expenditures and TFP

1.a.-Government expenditures: Assume that the economy is converging to its long

term steady state along the saddle path. At time t=0, it has a level of capital per

effective worker given by k(0), which is half of the steady state level of capital, k*.

At time t=0 it is learned that the government expenditure changes from 0 to a level G(1)>0,

and that the change will take place for T periods, and back to 0 thereafter.

Show the qualitative dynamics of consumption and capital.

How is T affecting the dynamics?

1.b.- TFP.- Assume that the economy is converging to its long term steady state

along the saddle path. At time t=0, it has a level of capital per effective worker given

by k(0), which is half of the steady state level of capital, k*.

At t=0 it is learned that

total factor productivity drops temporarily from z to z' and that the change will take

place for T periods, and back to z thereafter. Show the qualitative dynamics of

consumption and capital

The amounts of money ($) spent by 14 students for their breakfast this morning are:

10, 9, 7, 5, 10, 9, 10, 3, 5, 7, 8, 7, 7, 10

a. Calculate the sample mean, median, and mode. Interpret these values. What type

of distribution does it represent, symmetric, skewed to the right or skewed to

the left?

b. Calculate the sample first quartile, third quartile, and interquartile range.

Interpret these values.

c. Calculate the sample standard deviation. Interpret this value.

Explain how each of the following transactions generate two entries- a credit and a debit- in the Canadian balance of payments account, and describe how each entry will be classified:

(i). During travel in France, a Canadian citizen buys a dinner in a French restaurant for $100 and pays with a visa credit card. [2.5 points]

(ii). A Canadian-owned factory in Britain used local earnings to buy additional machinery. [2.5 points]

(B). Assumed in a closed economy: Y= C + I + G C= a + b(Y - T) T= d + tY Where, Y = Output, I = Investment, G = Government expenditure, C = Consumption and T = Taxes

a, b, c and d >0

(i).What are the endogenous and exogenous variables in this model? [2.5 points]

(ii). What is the equilibrium value of Y?

Suppose that the demand equation for a monopolist operating in Nairobi is and the cost function is C(x) = 50x + 100 where x is the production level a) Given that the total revenue R (x) =xP and that the Total Profit realized P(x) = R(x) - C(x), determine the R(x) hence the P(x).( 4 Marks( b) Using the result in (a) above determine the production level x that maximizes Profit and hence the maximum profit.(6 Marks)

c) The marginal revenue function (MR) for a product is MR = 44 - 5q. The marginal cost is MC = 3q + 20, and the cost of producing 80 units is Ksh.11,400 where q are the number of units produced and sold. i. Determine the total profit function P(q) (8 Marks) ii. Using the result in (i) above, and the profit or loss from selling 100 units of the product