Macroeconomics

PROBLEM I
ABC Corp is a small Canadian firm that sells staples in Canada, which is a very competitive market. The staples can be classified as a standard commodity, with stores viewing the staples as identical to those supplied by other firms.

Recent news has indicated that 1) due to the growing Canadian economy, the overall demand for staples will by 3% and 2) the overall market supply of staples will decrease by 3 % because of the exit of foreign competitors.

Assuming these things, what should ABC Corp do with its production? Explain.

PROBLEM II
In the late 1990s, ABC Country imported more than 60,000 tons of product X at $3.30 per lb, from Company A, because it was not produced in the country. However, in 2005, Company B (a domestic corporation in ABC Country) began producing product X, which resulted in the worldwide production capacity of product X doubling.

Both Company Aâ??s and Company Bâ??s marginal cost of producing and distributing product X is $1.40 per lb and demand is constant at Q = 416 â?" 160P (in millions of lbs).

Shortly after Company B entered the product X market, the worldwide price dropped to $1.40. By 2009, however, the price of product X went back to $3.30 per lb.

Using theories of macroeconomics, explain what happened in the market and provide applicable calculations to support you answer.

PROBLEM III
Assume that the following:
Company A and Company B are the only two car manufacturers in a given market. Fortunately for Company A, it not only has a patent that allows it to manufacturer cars faster than Company B, and, at a lower cost, but it was also able to choose its profit-maximizing output level in the market, first.

The inverse demand function for cars is P = 8000 â?" 40(Q).
Company A's costs Ca (Qa) = 400Qa
Company B's costs Cb(Qb) = 800Qb

Explain whether or not it would be profitable for Company A to merge with Company B (show calculations as appropriate).