Question

Dumping Assume that a firm is a monopolist at Home facing the inverse-demand curve, P = 10 − Q, but is one of many competitors in the world market, where it can sell its output at a price Pw = 2. Furthermore, assume that the firm’s total cost is given by: T C (Q) = 10 + Q2 . Answer the following questions:

1. (a) Find the optimal level of output that maximizes the firm’s total profits. Is it optimal for the firm to export?

2. (b) What happens if Pw increases to 4? Explain the economic intuition.

3. (c) Now suppose that Pw = 6. Is this firm dumping?

Answer 1

a)

P	Q	TR	TC	Profit
10	0	0	10	-10
9	1	9	11	-2
8	2	16	14	2
7	3	21	19	2
6	4	24	26	-2
5	5	25	35	-10
4	6	24	46	-22
3	7	21	59	-38
2	8	16	74	-58
1	9	9	91	-82
0	10	0	110	-110

The optimal level of output is Q= 3. As the world price is lesser than and domestic price, it cannot export

b) With the increase in price to $4,still the domestic price is greater and hence it cannot export as it would lead to losses

c) Yes as the price is world market is less than the domestic price