Question

Currently the U.S. exports 525 million pounds of pork to China and sells them there for about $2.50 per pound. The average cost of producing a pound of pork in the Mid-West and shipping it to China is about $0.55.

a. Draw a graph to illustrate the profit-maximizing conditions of this situation assuming any market type you like.

b. What is the (a) total revenue, (b) total cost, and (c) profit under these conditions?

c. Since the Trump Administration imposed a 25% tariff on Chinese steel that is used to make farm equipment, the production cost go up by the same percentage as the tariff, what is the new cost per pound and profit?

d. Now, suppose China retaliates reciprocally with a 25% tariff on pork imports (U.S. pork exports to China), what are the most likely implications of such a policy in both China and the US? Do actual calculations.

e. Use your knowledge and understanding of economic principles to freely commenton this state of affairs if you are told that the price elasticity of demand for pork in China is 1.13, and the income elasticity of demand for pork in China is 1.18.

PLEASE HELP!

Answer 1

A).

Consider the given market is the perfectly competitive, => TR=P*Q and the “TC=c*Q”, => the Profit function is given by.

=> A = TR-TC = P*Q - c*Q, => FOC require dA/dQ=0.

=> d(TR)/dQ - d(TC)/dQ = 0, => MR-MC=0, => MR=MC. So, at the optimum “MR” must be equal to “MC”, => the profit maximizing condition is “MR=MC”. Now, here in perfectly competitive market “MR=P=2.5” and “MC=0.55”, => “MR > MC”, => the production of additional unit of pork is profitable. So, here US will try to export as much as possible but here US is exporting “525 million pounds of pork”. Consider the following fig.

So, here "Q1" be the amount imported and the profit is given by the shaded area."

B).

Now, given the problem here “TR = PQ = $2.5*525 = $1,312.5” and the “TC = $0.55*525 = $288.75”, => the profit is given by “TR-TC = $1,312.5 - $288.75 = $1,023.75 million”.

C).

Now, if US impose “25%” tariff on Chinese steel, => increase the production cost of pork by the same amount, => the new cost function is given by, “TC = 0.55*1.25*Q = 0.6875*Q.

So, the profit is given by, “TR-TC = (2.5 - 0.6875)*525 = $951.5625 million. So, the profit decreases.

D).

Now, let’s assume that the china retaliates reciprocity with 25% tariff on pork import, => the price of pork in China also increases, => the import demand for pork decreases from “525 million”, => the profit of US further decreases. So, here both the country worse off.

E).

Now, the price elasticity of demand for Pork is “1.13”, => if price of pork decrease by “1%”, => the demand will increases by “1.13%”. Similarly, the income elasticity of demand for Pork is “1.18”, => if income increase by “1%”, => the demand will also increases by “1.18%”. So, here demand will increase more under increase in income compare to decrease in price. So, here to increase the profit US should such a policy that will increase the income of the china to increase the profit. Since increase in income is much more effective compare to decrease in price.