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3. Assume that two countries, A and B, produce steel for export markets. Steel from both countries is regarded by world buyers asperfectly substitutable (so that steel from each country has tosell at the same price in the world market). To make the analysiseasier, assume that there is only one steel producer in eachcountry. Assume also that the marginal cost of producing a ton of steel in country A is $10 and in country B it is $11.

(a) If the two countries' producers play a Bertrand game in the export markets, what would be the Bertrand-Nash equilibrium price of steel?
(b) Now assume that the two countries are engaged in Cournot competition in the steel export market. With this assumption, can you calculate the world price of steel if the world (inverse)demand for steel is given by p = 100 - X, where X is the total supply of steel into the world market? [Hint: write down first-order conditions for profit maximization for each steel producer. This will give you two equations in two unknowns (which are each country's steel output). You can then solve for Cournot-Nash equilibrium output supplies.]
(c) Calculate shares of steel exports going to each country in the Cournot-Nash equilibrium. Now assume that country B decides to subsidize its country's steel export to the amount of $1 per ton. What will be the share of world exports of steel going to country B's manufacturer? What will happen to country A's exports of steel? What will happen to the world price of steel?

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Joshua Stredder
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28 Sep 2019

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Related questions

In 2003, China became the world's largest importer of iron ore. Between 2004 and 2005, China's steel production increased from by 26% from 270 to 340 million metric tons, or about one-third of world production. Fueled by rapid economic growth, production was projected to increase by a further 9% to 370 million tons in 2006. Iron ore is graded as fine and lump according to whether the majority of individual's particles have diameter of less or more than 4.75 millimeters. A third grade-pellets- is fined grained concentrate rolled into balls with diameter of 9.55 to 16.0 millimeters. Lump ore and pellets can be charged directly to a blast furnace, hence are most costly to use. Three companies- Australia's BHP and Rio Tinto, and Brazil's Companhia Vale do Rio Doce (CVRD)- control over 70 percent of worldwide exports of iron ore. By 2005, China purchased over 40% of world iron ore imports. Europe and Japan bought less than 25% and 20% respectively, in 2004, the principal sources of China's iron ore imports were Australia (78 million tons), India (50 million tons), Brazil (46 million tons), and South Africa (11 million tons). China imports a total of 5.7 million from other sources including Canada, Russia, and the USA, in 2005, China's import comprised 71% fine ore, 19% pellets, and 10% lumps. China imports of iron ore from India have been so large that Indian steel manufacturers lobbied their government to limit exports to China. To meet the burgeoning demand from China, BHP Billiton increased production by 45% from 72 million tons to about 105 million tons in just three years, 2002-05. Smaller Australian mining companies have also increased production capacity. These include Atlas Iron Ore, Fortescue Metals Group, Gindalbie Metals, Midwest Iron and Steel, Resource Mining Corporation, Golden West Resource, and Polaris. The big three iron one producer has entered into long-term supply contracts with major steel manufacturers. These contracts might specify minimum quantities that the ore producer must sell and the manufacturer must purchase. Steel manufacturers buy on free-on-board (FOB) basis. FOB buyers pay for freight. These contracts further specify that prices must be negotiated on an annual basis. European steel manufacturers buy relatively more fine ore. Prices for fine ore set the benchmark for prices for lump ore and pellets. The China Iron and Steel Association represent sixteen of China's major steel manufacturers in negotiation with iron ore producers. The association includes Baoshan Iron and Steel, which imports all of its iron ore, Maanshan Iron and Steel, which imports 75% of its iron ore, Chongqing Iron and steel, which imports 60 % and Angang New Steel, which imports relatively little iron ore. In late 2004, Nippon Steel of Japan agreed a substantial price increase with CVRD. Subsequently, CVRD and Rio Tinto negotiated a sharp 71.5% price increase with the China Iron and Steel Association for shipments in 2005-06. BHP Billiton calculated that the freight cost of shipping iron ore from Australia to China was about US $20 per ton less than shipping from Brazil. Accordingly, BHP sought a US$7.50 to $10 per ton surcharge from the China Iron and Steel Association in addition to the 71.5% price increase. The association rejected the surcharge as unreasonable and against international practice. China's Ministry of Foreign Affairs declined to intervene, saying that negotiation between BHP and Chinese steel manufacturer were commercial issue. However, China's Deputy Commerce Minister Ma Xiuhong remarked that BHP's surcharge would damage long-term relations between China and Australia. Meeting with resistance from the China Iron and Steel Association, BHP dropped its demand for the surcharge. However, Mr. Graeme Hunt, President of BHP Billiton Iron Ore, said that would raise the issue in the following year. Subsequently, BHP Billiton announced an 89% jump in profit to $6.4 billion for the year to June 2005, which was a record for an Australian company. China sales accounted for 12.6% of total revenue. BHP agreed to co-sponsor the 2008 Beijing Olympic Games by contributing money as well as golf, silver, and bronze for medals. Mr. Clinton Dines, President of BHP in China, said that the co-sponsorship would not dissuade BHP from re-opening discussions of surcharge. Meanwhile, Rio Tinto's profit increased 58% from $3.3 billion in 2004 to a record $5.2 billion in 2005. China sales accounted for 15% of total revenue.

Discussion question:

1. Why would steel manufacturers and iron ore suppliers agree to minimum purchases/sales in long-term contracts?

2. What advantage(s) would BHP Billiton gain by pricing steel manufacturers on a CIF (cost insurance and freight) rather than FOB basis?

3. What advantage(s) do Chinese steel manufacturers gain by negotiating jointly with iron ore suppliers?

4. How can Chinese steel manufacturers improve their bargaining position relative to BHP Billiton?

Question 1

  1. In 2003, the ________ ruled that U.S. tariffs on steel imported from the EU were unfair and allowed the EU to issue retaliatory tariffs on U.S. products.
    Ā  Ā 
    World Trade Organization
    Ā  Ā 
    United Nations
    Ā  Ā 
    European Central Bank
    Ā  Ā 
    International Human Rights Commission

Question 2

  1. The idea of the U.S.-Canadian Free-Trade Agreement that ________ barriers to trade including tariffs and quotas between the United States and Canada by 1998 was to increase the amount that the United States exports to Canada and the amount that the United States imports from Canada.
    Ā  Ā 
    increased all
    Ā  Ā 
    removed some
    Ā  Ā 
    removed all
    Ā  Ā 
    increased some

Question 3

  1. According to the theory of comparative advantage, a country should specialize and ________ goods with ________ opportunity cost.
    Ā  Ā 
    import; the lowest
    Ā  Ā 
    import; negative
    Ā  Ā 
    export; the lowest
    Ā  Ā 
    export; the highest

Question 4

  1. A quota is a restriction on imports.
    True
    False

    Question 5

    1. If Holland decreases subsidies to its tulip growers, the price of tulips in the United States will rise.
      True
      False

    Question 6

    1. According to comparative advantage, trade between two countries allows ________ of the trading countries to use its resources most efficiently.
      Ā  Ā 
      only the smaller
      Ā  Ā 
      only the larger
      Ā  Ā 
      neither
      Ā  Ā 
      each

    Question 7

    1. ________ U.S. president(s) who has/have held office since GATT was signed has argued for free-trade policies, yet each one has used his powers to protect various sectors of the economy.
      Ā  Ā 
      Only one
      Ā  Ā 
      No
      Ā  Ā 
      Every
      Ā  Ā 
      Only 3

    Question 8

    1. In 1991, the European Union began the process of forming the
      Ā  Ā 
      largest free-trade zone in the world.
      Ā  Ā 
      only continental military force in the world.
      Ā  Ā 
      first international trade agreement in the world.
      Ā  Ā 
      first unified currency in the world.

      1. Question 9

        1. The Smoot-Hawley tariff set off an international trade war in the
          Ā  Ā 
          1930s.
          Ā  Ā 
          1950s.
          Ā  Ā 
          1970s.
          Ā  Ā 
          1990s.



          Please help me with these questions Thank you.

As a global manager, create a scenario analysis using the three-sector model: real loanable funds market, real goods market, and the foreign exchange market for the following scenario:

In the post-World War II period, the economies of Japan and Germany were rebuilt, and both economies were able to achieve economies of scale in the steel and automobile industries. In the mid-1990s, India and China built labor-intensive industries in the apparel industry, followed by other labor-intensive industries that expanded through an export-led growth policy on the part of China. Vietnam followed this type of policy beginning in 1986. The country has achieved stable growth, low inflation, and increasing prosperity. In the early 2000s, South Korea became a major producer of automobiles and also expanded production in technology and related consumer goods for export. Currently, high-income economies (using the World Bank GNI per capita classification system) in North America, Europe, and the Far East (the Triad Area) engage extensively in trade in consumer goods. We find that the current level of global exports is about $19 trillion. The trade between nations of the Triad Area represents about $9.5 trillion. In the euro-zone, there is a division between stronger nations (Germany and France, for example) compared to other nations facing significant macroeconomic problems (Greece

Step 1: Describe the initial economic setting of the three major macroeconomic markets (i.e., the real goods market, real loanable funds market, and foreign exchange market) for the nations being analyzed.

Step 2: Identify the economic shock (or expected shock) to the nations.

Step 3: Analyze the chain reaction of economic interactions.

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