The average cost curves for individual call centers in each location are as follows (in tens of thousands of dollars):

ATC_US = 14 - 6q + q²

ATC_Philippines = 18 - 8q + q²

Overall demand for call centers (i.e., across both markets) is given by:

Q = 800 - 100P

Where Q = the number of call centers demanded and P equals the price of a call center, in tens of thousands of dollars.

1.

Which location will most firms looking for call center services likely pursue?

Why?

Give detailed reasons for your evaluation (i.e., a quantitative answer, not simply a qualitative one).

2.

Given your answers in part a), what will the long run price for call centers be in the market? [price]

Assume that the market remains competitive in the long run, given the low barriers to entry.

3.

If this is still a perfectly competitive market long term, how many firms will there be in the long run?

What will HHI be?

Several years pass and many firms have now entered the call center industry in the Philippines instead of the US. As a result of this additional entry, labor prices in the Philippines have increased. Thus, the total cost curve for firms running call centers in the Philippines has increased to be:

TC_Philippines = 16 +q²

where q is the number of call centers operated by a firm. The estimated number of firms running call centers in the Philippines is now 200. In response to political pressure over perceived outsourcing of call centers to the Philippines, the US government decides to impose a tax of $10,000 (i.e., tax = 1, in tens of thousands of dollars) on call centers owned by US firms in the Philippines. For simplicity, assume that all of the call centers in the Philippines represent call centers owned by US firms. You may assume that the overall demand function is unchanged (i.e., the demand curve is the same as above).

4.

What is the overall supply curve for call centers in the Philippines before the tax?

5.

What is the market price before the tax is imposed?

6.

What is the market price after the tax is imposed?

Who pays the tax (i.e., the consumer or the call center suppliers)? Be specific about who pays the tax.