"The Chinese government uses subsidies for a variety of purposes, and subsidies come in a variety of forms. Tax subsidies, preferential loans, and grants are the most common form of subsidy. The government also provides favorable input prices and transfers assets to favored firms at prices that are below market value. Chinese subsidies are both practical and strategic. Practical subsidies reward companies for accomplishing a social policy goal, such as investing in disadvantaged regions to alleviate unemployment. Strategic subsidies are those that seek to advance the overall economic well-being of the country by earning foreign exchange, promoting technological development, developing an industry that the government views as being important, or otherwise enhancing China's industrial competitiveness. In competitive international markets, such subsidies would be expected to increase economic activity of favored industries in China relative to activity in the United States. This means higher levels of Chinese output and exports and lower levels of U.S. output and exports." 1 To examine the effects of a subsidy, consider the large passenger jetliners market with two firms that sell identical products, Firm 1 and Firm 2. Without any subsidy, both firms will have the same cost functions of C(q) = 40q and MC = 40. The market demand is P = 100 - Q. Show your numeric calculations to get credit a. Solve for the Cournot equilibrium price, quantities, and profits for each firm given the same MC= 40. b. Compare the deadweight loss in a monopoly, a Cournot duopoly, and a Bertrand duopoly if both firms have the same marginal cost of 40.
"The Chinese government uses subsidies for a variety of purposes, and subsidies come in a variety of forms. Tax subsidies, preferential loans, and grants are the most common form of subsidy. The government also provides favorable input prices and transfers assets to favored firms at prices that are below market value. Chinese subsidies are both practical and strategic. Practical subsidies reward companies for accomplishing a social policy goal, such as investing in disadvantaged regions to alleviate unemployment. Strategic subsidies are those that seek to advance the overall economic well-being of the country by earning foreign exchange, promoting technological development, developing an industry that the government views as being important, or otherwise enhancing China's industrial competitiveness. In competitive international markets, such subsidies would be expected to increase economic activity of favored industries in China relative to activity in the United States. This means higher levels of Chinese output and exports and lower levels of U.S. output and exports." 1 To examine the effects of a subsidy, consider the large passenger jetliners market with two firms that sell identical products, Firm 1 and Firm 2. Without any subsidy, both firms will have the same cost functions of C(q) = 40q and MC = 40. The market demand is P = 100 - Q. Show your numeric calculations to get credit a. Solve for the Cournot equilibrium price, quantities, and profits for each firm given the same MC= 40. b. Compare the deadweight loss in a monopoly, a Cournot duopoly, and a Bertrand duopoly if both firms have the same marginal cost of 40.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:"The Chinese government uses subsidies for a variety of purposes, and subsidies come in a variety of forms. Tax subsidies, preferential loans, and grants are the most common form of subsidy. The
government also provides favorable input prices and transfers assets to favored firms at prices that are below market value.
Chinese subsidies are both practical and strategic. Practical subsidies reward companies for accomplishing a social policy goal, such as investing in disadvantaged regions to alleviate unemployment.
Strategic subsidies are those that seek to advance the overall economic well-being of the country by earning foreign exchange, promoting technological development, developing an industry that the
government views as being important, or otherwise enhancing China's industrial competitiveness.
In competitive international markets, such subsidies would be expected to increase economic activity of favored industries in China relative to activity in the United States. This means higher levels of
Chinese output and exports and lower levels of U.S. output and exports." 1
To examine the effects of a subsidy, consider the large passenger jetliners market with two firms that sell identical products, Firm 1 and Firm 2. Without any subsidy, both firms will have the same cost
functions of C(q) = 40q and MC = 40. The market demand is P = 100 - Q.
Show your numeric calculations to get credit
a. Solve for the Cournot equilibrium price, quantities, and profits for each firm given the same MC= 40.
b. Compare the deadweight loss in a monopoly, a Cournot duopoly, and a Bertrand duopoly if both firms have the same marginal cost of 40.
c. How would this market change if Firm 2 receives a subsidy lowering the marginal cost to 25 and Firm 1's marginal cost remains at 40. Calculate new market equilibrium quantity, price, and profits
for each firm.
d. Calculate the change in welfare after the subsidy. In this case welfare is defined as the Firm 2's profit minus the subsidy. Who gains from the subsidy? Explain.
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