Tariff under Foreign Monopoly.
Under a partial equilibrium model, suppose that the domestic de
mand for a good in an economy is given by $Q = a - P$ where Q deno
tes quantity demanded and P denotes a market price.
1. (6 points) Suppose that there is no domestic firm, but ther
e is only foreign monopolist whose marginal cost is given
by $MC = Q$. Find out the price and the amount of goods pr
oduced for the economy under the free trade system. Als
o calculate the size of welfare under the free trade.
2. (6 points) Suppose that there is no domestic firm, but ther
e is only foreign monopolist whose marginal cost is given
by $MC = Q$. Find out the price and domestic consumption
when the government of the economy imposes tariff, $t > 0$.
Also calculate the size of welfare under the tariff policy.
