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Equilibrium output and price in world economy

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There are two countries in the world, A and B, that produce a product X. The demand functions in A and B are identical and as follows:

PA = 500 - 50QA PB = 500 - 50QB where P is the product price and Q the quantity demanded.

Country A innovated the product, and the total cost function is as follows:

CA = 375 + 100QA

C is the total cost of the firm, and Q the quantity produced by all firms. Note that there are external economies of scale.

a) What is the equilibrium output and price in the world economy (there is no production in Country B)?

b) Assume that Country B innovates a new process technology and its market average cost function is as follows:

CB = 375 + 29QB

Government B plans to encourage domestic production and then exports of this product. What should be minimum amount of subsidy to encourage domestic production?

c) What will be the new equilibrium quantity as a results of that policy? Who will export the product?

Reference no: EM132542162

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