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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.

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.

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).

Solution Preview

1) growing economy leads to increase in demand, hence quantity demanded increase and price goes up
2) decrease in supply leads to reduced quantity supplied and price goes up

So you can conclude from these two news that quantity goes down and price goes up.

In the short run, market price will go up and ABC should increase production to meet the extra demand. ABC, and all other staple firms, will make an economic profit in the short run.

In the long run, more firms will enter into the staple industry (because it is profitable), this will increase supply and drive up the price. ABC will decrease production back to the original level as a result of more firms entering in.

2. There is a bit of problems with this question if we attack it mathematically;
We are given that demand is Q = 416 â?" 160P rearrange and get P = 2.6 - Q/160, we are also given that the initial price is $3.30 per lb, if you substitute P = 3.3 ...