Part A

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PartA

  1. As far as the economic outcomes are concerned, monopolies are characterized by inefficiencies, lack of innovation, deadweight loss and super normal profits. Futures Unlimited has the only license to manufacture the plutonium isotope in the country and since there is no competition it can charge whatever price for the commodity. Futures Unlimited is in a good position to make super normal profits in the year 2199 because it can set its own prices in the market. In most markets, firms usually make normal profits, this occurs when the average revenue is equal to the average total cost. At such a level, firms are able to pay their workers and managers reasonable wages and salaries. Firms like Futures Unlimited earn some extra profit over the normal profit since the average revenue is greater than the average total cost. One would reckon that since Futures Unlimited Corporation is making abnormal profits, other players would be attracted into the plutonium manufacturing business. However, it is unlikely that other firms will enter the market because Futures Unlimited Corporation is the only licensed plutonium manufacturer in the country. Other companies would be barred from entering into the plutonium manufacturing business. Therefore, Futures Unlimited Corporation would continue making supernormal profits well into the year 2200 and in the future unless the entry barrier is broken. A monopoly usually faces a downward sloping demand curve and to sell more, the price has to decrease. However, the monopoly will usually expand its output until its marginal revenue is equal to its marginal cost, which the profit maximizing condition for a monopoly. Output will also increase provided the total revenue exceeds the total cost. A good example of a monopoly would be Microsoft computers back in the 1990’s. Microsoft offered its browser, the internet explorer as part of its operating system at no extra cost since there were a few companies who had developed internet browsers at the time. Internet explorer 6 therefore became the default browser for most computers since it came with the operating system despite the fact that it was very inefficient and had a lot of deficiencies. However, a few years later many companies developed their browsers and internet explorer lost its dominance as Firefox, Safari and Google Chrome took up its market share [ CITATION Eco16 l 1033 ].

  1. Futures Unlimited Corporation has been formed by way of government licensing. Thus creating a legal barrier for other companies which would wish to produce plutonium. Futures Unlimited can set its own price by just producing whichever output amount of plutonium in the market. They are the only price setters for plutonium and whatever price Futures Unlimited Corporation sets becomes the price regardless of the output since there is no competition in the manufacture of plutonium. However, Futures Unlimited would have to ensure that they produce the plutonium at a quantity where marginal cost is equal to marginal revenue in order to enjoy maximum profits. The rate of output can be set at a price along Future’s Unlimited Corporation demand curve.

PartB

  1. Both tariffs and quotas are government measures to protect the local producers or industries from the external markets. However, each protection measure yields a different effect on the consumers and each measure can be effective depending on the circumstances. In the end, the consumer ends up paying higher prices for goods and services imported as a result of the tariffs or quotas imposed on imports. A tariff is a duty or a tax charged on imported goods while a quota imposes a limit on the number of items that can be imported. Both the tariffs and the quotas intend to protect the local industries and each can be beneficial to the consumers. A tariff would have a more immediate effect on prices of commodities when imposed when compared with a quota which puts a limit on the number of items. As far as consumer benefit is concerned, a tariff and a quota would be more beneficial when market conditions change. For instance, when domestic demand increases as a result of increased incomes the tariffs increase the prices but this does not discourage demand. On the other hand, when there is a decrease in imports, a quota ensures that the maximum limit of items is imported thus protecting the consumers [ CITATION Sur16 l 1033 ]. A good example of consumer benefiting from quotas would be that of U.S quotas imposed on Japanese cars. The U.S has restricted Japanese cars in the U.S since 1981 under the voluntary restraint agreement. The restriction imposes a quota on Japanese cars entering the U.S market while protecting the local industries. The U.S car makers reported the best year in sales since 1979 after recording a $10 billion contribution[CITATION Edw85 l 1033 ]. It is also important to mention that American car manufacturers were protected from low cost Japanese vehicles and the American brand image has stood the test of time. In addition, U.S consumers paid more money for the American vehicles which in turn contributed more revenue to the U.S economy.

2a) According to the table, both Russia and Panama produce gloves andhats. An opportunity cost is the value of the foregone alternative.In other words, since both countries produce gloves and hats, theopportunity cost would be the product that the country does secondbest. In Russia’s case, the opportunity cost for producing 20gloves would be to produce 80 hats. While the opportunity cost forproducing 80 gloves would be 20 gloves. In Panama’s case, theopportunity cost for producing 180 gloves would be 90 hats and theopportunity cost for producing 90 hats would be the 180 glovesproduced every week.

2b) The two countries should not trade if they had an opportunity totrade. Panama has a competitive advantage in producing gloves overRussia. Panama produces 180 gloves per week as compared to Russia’s20 gloves per week. Russia on the other hand, does not have acompetitive advantage over Panama in making hats since they only make80 hats compared to Panama’s 90 hats. In competitive advantage,countries are required to produce goods or services they haveexpertise or specialize in. By doing so, they can focus theirenergies on what they do best while leaving the production of otherproducts to other countries. An ideal situation would have been ifRussia produced more hats than Panama. In such a situation, Panamawould have concentrated on producing gloves while Russia would havetaken up making hats. Therefore, it does not make any sense for thetwo countries to trade as only one country has a competitiveadvantage over the other.

Reference

Economics Online. (2016). Monopoly Power. Retrieved August 10, 2016, from Economics Online: http://www.economicsonline.co.uk/Market_failures/Monopoly_power.html

Edward, L. (1985, February 1). The Costly Truth About Auto Import Quotas. Retrieved August 10, 2016, from Heritage: http://www.heritage.org/research/reports/1985/02/the-costly-truth-about-auto-import-quotas

Suranovic, S. M. (2016). The Choice Between Import Tariffs and Quotas. Retrieved August 10, 2016, from International Trade Theory &amp Policy: http://internationalecon.com/Trade/Tch110/T110-4.php

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