Consider an upstream firm in Russia that mines iron ore at a total cost of $15q, where q is the number of tons of ore. This upstream firm then ships ore to Germany for processing.
Shipping costs $3 per ton. These costs are paid for by the Russian firm. Once the ore is in Germany, it is bought buy a German firm and then converted into steel. The German firm can convert one ton of iron ore into one ton of steel at a transformation cost of $6 per ton.
It then sells steel in a market where it faces an inverse demand curve of:
P = 900 - 3Q where P is the price of steel and Q is the amount of steel sold (measured in tons).
A) If the Russian firm is a perfect competitor, what is the quantity of steel that will be sold? What is the price of steel? What is the price of iron ore? What are the profits of the Russian firm? What are the profits of the German firm?
B) If the Russian firm is a monopolist, what is the quantity of steel that will be sold? What is the price of steel? What is the price of iron ore? What are the profits of the Russian firm?
What are the profits of the German firm?
C) Under what conditions would the German firm prefer to be a multinational firm? If it does become a multinational firm, what is the quantity of steel that will be sold? What is the price of steel? What is the price of iron ore? What are the profits of the Russian firm?
What are the profits of the German firm?
D) Does anyone prefer to have a Russian and a German monopoly rather than a multinational corporation? Why or why not?