1. Theory Question:
Hint to reduce word count: when you present calculations, do not insert spaces between numbers or mathematical signs, as it will be counted as separate words.
Theory question: Assume that Vietnam has a demand for laptops of Q=20.000.000 — 5000 P
Assume further that two companies produce identical laptops in Vietnam: Astra-PC and Be-U. Assume that company A and company B have marginal costs of MCA=MCB=2500. Suppose that the marginal costs are the only costs of production and that there are no transport costs. The companies produce and sell their laptops only in Vietnam.
Consumers are indifferent among the two brands and perceive both types of laptops to give them an identical utility. Suppose further that there are no other companies that sell laptops in Vietnam.
(a) Calculate the equilibrium price and sales quantity for companies A and B if they follow a Cournot model. Calculate the profit of company A and company B. Calculate the consumer surplus, companies profit and welfare loss compared to a free market situation.
(b) Assume now that a Japanese laptop producing company, J-Laps, is allowed to sell as many laptops in Vietnam as they like. Assume that the laptops of company J are identical to the ones produced by company A and B. Assume that company J has marginal costs of MCJ=1900 which is their only cost of production.
Assume further that there are no transport costs. Furthermore, assume that Vietnamese customs apply a 15.8% ad valorem tariff on the sales price of laptops sold by company J in Vietnam. Calculate the new sales price, new sales quantity, new consumer surplus and the profit of the three firms. Round up to the nearest money unit.
(c) Compare your results from questions a) and b). Discuss if the changes in price, quantity, welfare and profits is what would be expected in the case of opening up to trade.
(d) Assume now that Vietnamese customs decides to remove the tariff. How does this change the results you had in b) (price, quantity, consumer surplus, profit of firms)? Who are the greatest winners and greatest losers in terms of welfare and/or profits from this reduction of protectionism?