You’ve been invited to help a foreign affiliate of your company set next year’s prices. Inflation last year was 5%, the unemploy
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Answer:
Assume there are no transportation costs. With trade, the price of $22.5 brings about balance in exports and imports. At this price, 600 smartphones are traded. With trade, Sweden produces 900 smartphones and consumes 300 smartphones, and Norway produces 300 smartphones and consumes 900 smartphones.
Now suppose the per-unit transportation cost from Sweden to Norway is $5. With trade, the transportation cost changes the price of smartphones in Sweden to $25 and in Norway to $25. Sweden will produce 800 smartphones and consume 400 smartphones, thus exporting 400 smartphones. Norway will produce 400 smartphones and consume 800 smartphones, thus importing 400 smartphones.
Explanation:
With no transportation costs, Sweden shall export smartphones and Norway shall import smartphones because the market price is lower in Sweden than in Norway.
The demand and supply functions for smartphones in Sweden, derived from the given values, are:
The export supply (ES) equation is:
ES = 40P - (1200 - 40P)
ES = 80P - 1200
The demand and supply functions for smartphones in Norway, derived from the given values, are:
The import demand (ID) equation is:
ID = 1800 - 40P - (40P - 600)
ID = 2400 - 80P
The equilibrium price and quantity traded is determined where ES = ID.
80P - 1200 = 2400 - 80P
This simplifies to P = 22.5
Q = 2400 - 80(22.5) = 600
Next, a transaction cost of $5 per unit is imposed from Sweden to Norway. This changes the ES function as follows.
New ES = 80(P - 5) - 1200
New ES = 80P - 1600
The new equilibrium is where New ES = MD.
80P - 1600 = 2400 - 80P
This simplifies to P = 25
Q = 80(25) - 1600 = 400