Widgets are made only in America. They are provided by a constant-cost industry, which is in long-run equilibrium. The following charts show the American demand curve for widgets, the foreign demand curve for widgets, and the marginal cost curve of a typical American widget firm.

Initially, American firms are not allowed to sell to foreigners. (Thus, the foreign demand curve is irrelevant.) In the United States, the industry is in long-run equilibrium and widgets sell for $7 apiece. Now the government decides to issue 10 export licenses; a firm with an export license can sell as many widgets to foreigners as it wants to. The export licenses are sold at auction to the highest bidders.
a. What is the price of an American widget sold on the foreign market?
b. What is the price of an export license?
c. In the short run, what is the new price of a widget sold in America? Be sure to justify your answer.
d. In the long run, what is the new price of a widget sold in America?

Transcribed Image Text:

Firm's Marginal Cost Curve Foreign Demand Price American Demand Marginal Cost $2 Quantity Quantity 150 140 120 100 90 80 70 Quantity 200 160 75 Price 4. 13 15 17 45 30 15 13 15 17 13 15 17 60