6. Consider a market for CDs in a country called Home that has only one producer

Question

6. Consider a market for CDs in a country called Home that has only one producer, Music, Inc. Suppose that the demand curve is given by: Q=100-P, where Q is the number of CDs demanded in that country per month and P is the price per CD in that country. The marginal cost of producing a CD is $ (a) Work out the price, quantity, Music, Inc.'s profit, and consumer surplus under autarky (b) Now, suppose that although Music, Inc. is still unable to reach any export markets, a foreign producer is now able to sell in Home. Initially the foreign producer sells 2 units in Home. Assuming that consumers view the foreign CDs as perfect substitutes for Music, Inc.'s CDs, and assuming that Music, Inc. takes as

Explanation / Answer

a) Q = 100-P

P = 100-Q

TR = 100Q-Q2

MR = 100-2Q

Equilibrium is established where MC = MR and MR is rising thereafter

100-2Q = 6

2Q = 94

Q = 47

P = 53

b) If Foreign seller sells 2 units in home market, residual demand will be = 98-P

P = 98-Q

TR = 98Q-Q2

MR = 98-2Q

At equilibrium

98-2Q =6

2Q = 92

Q = 46

P = 100-46 = 54

c) In this case, residual demand is

Q = 10-P

P = 10-Q

MR = 10-2Q

At equilibrium

MR = MC

10-2Q = 6

2Q = 4

Q= 2

P = 10-2 = 8

There is a difference because majority market has been taken over by foreign seller and doemstic seller has ot survive on residual demand only which is too less.

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