The Effects of Reforming the Chinese Dual-Track Price System



is, the elasticity of supply with respect to p, esp, is non-negative:

xs = xs (p) ; eS = PXpx≥0.
p    xs   p

(5)


For simplicity, we shall assume throughout that the plan-track quantity is no
greater than the profit-maximizing supply at the plan-track price:7

x xs (p) .

The plan-track price for suppliers is assumed equal to the plan-track price for
consumers. Thus, compared to the market economy, the DTP system operates as
a tax on suppliers, transferring to consumers a portion of profit. If we denote the
profit function corresponding to (5) as
π(p), then total profit under DTP is

Π = π(p) (p p)x.

2.2 The CPI

In this section we explore how changes in plan-track parameters affect the weighted
average
P of the plan-track and market prices for the representative DTP good
7Given that x > 0, this implies that variable costs are covered at the plan-track price.

10



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