Question

CPFE is a producer of watches located in the US. Its production is either sold in the internal market or it is exported and sold in Europe. The demand for watches in the US is QUS = 500- 20PUS(dollars) and in Europe, QEurope = 750 - 5PEurope(euros). Assuming that the exchange rate US Dollar/Euro is e = 1.2, i.e., you need 1.2 dollars to buy 1 euro, the transportation costs are equal to $1 per watch, the cost of production is C (Q) = 10 + 15Q, C (Q) and PUS are measured in US dollars and PEurope is measured in euros, determine the following:

a) The optimal local prices and quantities in the US and the European markets (show work)

Answer 1

To determine the optimal local prices and quantities in the US and European markets, we need to find the equilibrium price and quantity in each market without trade. In the US market, the demand is QUS = 500 - 20PUS, and the cost of production is C(Q) = 10 + 15Q. In the European market, the demand is QEurope = 750 - 5PEurope.

Step-by-step explanation:

To determine the optimal local prices and quantities in the US and European markets, we need to find the equilibrium price and quantity in each market without trade.

In the US market, the demand is given by QUS = 500 - 20PUS, and the cost of production is C(Q) = 10 + 15Q. Setting the demand equal to the cost of production, we have QUS = 10 + 15QUS. Solving this equation, we find QUS = 40 and PUS = $25.

In the European market, the demand is given by QEurope = 750 - 5PEurope. Using the exchange rate e = 1.2, we can convert the European price to dollars by dividing by the exchange rate. So the demand becomes QEurope = 750 - 5PEurope/1.2. Setting the demand equal to the cost of production, we have QEurope = 10 + 15QEurope. Solving this equation, we find QEurope = 30 and PEurope = €150.