GLEF Tutorial

Global and Regional Economic Integration

QIU Jinyuan (linusqiu@[Link])
November ,

/
 Environment

Consider an economy producing a single consumption good. Quantity demanded is Qd = D−p d

and the
cost of producing Q units is given by F + cQ. Assume an interior solution, so that it is optimal for firms to
produce a positive amount of the good.

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 Autarky Monopoly

Assume the market is a monopoly.

. Derive the autarkic equilibrium quantity Qm m
A and price pA . (Profit maximization problem)

max pQ − F − cQ s.t. P = D − dQ
Q

max(D − dQ)Q − F − cQ
Q
D−c D+c
FOC: D − 2dQ = c ⇒ Qm
A = Pm
A =
2d 2

— You can also insert Q(p) into the profit function and derive the FOC in terms of p.
. Derive consumer and producer surplus under autarkic monopoly, CSm m
A and PSA .

1 D−C D−C 1 (D − C)2

CSm m m
A = (D − PA ) · QA · = · · =
2 2 2d 2 8·d
PSm
A = (p m
A − c) · Qm
A − F
= (pA − AC (Qm
m m
A )) · QA

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 Trade

Assume domestic is a net exporter. The demand function now becomes Qwd = 2D−p
d
.
. Derive the free trade equilibrium quantity Qm m
w and price pw .

max PQ − F − cQ s.t. P = 2D − dQ
Q

max(2D − dQ)Q − F − cQ
Q
2D − c c
FOC 2D − 2dQ = c ⇒ Qm
w = Pm
w = D+
2d 2
. Derive consumer and producer surplus under autarkic monopoly, CSm m
w and PSw .

CSm m m
w = (2D − Pw ) · Qw · 1/2
PSm m m m m m
w = (pw − C) · Qw − F = (pw − AC (Qw )) · Qw

. What happens to the price faced by domestic consumers after the domestic economy opens to
trade? Explain.
c D C
— D+ 2 > 2 + 2 ⇒ pm m
W > pA price rises because of higher world demand

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 Perfect Competition

Assume the market is perfectly competitive.

. Derive the autarkic equilibrium quantity Qpc pc
A and price pA .
— When the market is perfectly competitive, the price is given:
max pQ − F − cQ ⇒ p = c
Q

— But when p = c, profit π = −F < 0.

— Firm must have a non-negative profit means π = 0 ⇒ p = F+cQ
Q
— Market clear:
F + cQ
p= = D − dQ
Q
dQ2 + (C − D)Q + F = 0
!
pc (D − c) ± (D − c)2 − 4dF
QA =
! 2d
D + c − (D − c)2 − 4dc
ppc
A =
2
— Two solutions
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 Perfect Competition

Assume the market is perfectly competitive.

. Derive consumer and producer surplus under autarkic monopoly, CSpc pc
w and PSw .
pw

Qw

CSpc pc pc
A = (D − pA ) · QA · 1/2
PSpc
A = 0

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 Perfect Competition

Suppose the economy opens up to trade with a foreign economy of equal size. Assume domestic is a
net exporter. The demand function now becomes Qwd = 2D−p d
.
. Derive the free trade equilibrium quantity Qw and price ppc
pc
w.
— Just replace D as 2D
!
(2D − c) + (2D − c)2 − 4dF
Qpc
W =
! 2d
c − (2D − c)2 − 4dF
ppc
W = D +
2
. Derive consumer and producer surplus under autarkic monopoly, CSpc pc
w and PSw .

CSpc pc pc
w = (2D − pw ) · Qw · 1/2
PSpc
w = 0

. What happens to the price faced by domestic consumers after the domestic economy opens to
trade? Explain.
/ QIU Jinyuan | GLEF Tutorial