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1.Consider a country with the following aggregate demand curve for cars.

Q = 2000 – 20.P

There is a industry with following marginal and average cost curves.

MC = 20 + 0.01 Q

AC = 10 + 0.005 Q

Assume that the industry is a monopoly and there is no free trade.

What is the monopolist’s marginal revenue curve? (Hint: Express demand curve as P = A – B.Q form, and estimate MR)

What is the monopolist’s profit maximizing output?

What is the profit maximizing price?

What is the profit?

Show this in a diagram.

Assume that the industry is a perfectly competitive one, and there is no free trade.

What is the industry supply curve?

What are the equilibrium quantity supplied and price?

What is the loss or profit?

Show this in a diagram.

Assume again that the industry is a monopoly, and there is free trade in cars. The world price of a car is 25.

How many cars will be imported to the country?

How many will be produced at home?

What is the increase in consumer surplus?

Assume now that the government imposes a tariff of 3 per car.

How many cars will be imported to the country?

How many will be produced at home?

What is the dead weight loss?

What is the government revenue?

Assume that instead of tariff the government imposes a quota equal to the quantity imported under tariff and abolishes tariff.

Show the impact on a diagram.

Explain the impact in words.

Provide 5 reasons why quota is worse than tariff.