. Suppose that fixed costs for a firm in the automobile industry (start-up costs of facto- ries, capital equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished automobile. Because more firms increase competition in the market, the market price falls as more firms enter an automobile
3. Suppose that fixed costs for a firm in the automobile industry (start-up costs of facto-
ries, capital equipment, and so on) are $5 billion and that variable costs are equal to
$17,000 per finished automobile. Because more firms increase competition in the
market, the market price falls as more firms enter an automobile market, or specifi-
cally, P = 17,000 + (150/n), where n represents the number of firms in a market.
Assume that the initial size of the U.S, and the European automobile markets are 300
million and 533 million people, respectively.
a. Calculate the equilibrium number of firms in the U.S. and European automobile
markets without trade.
b. What is the
automobile industry is closed to foreign trade?
c. Now suppose that the United States decides on free trade in automobiles with
Europe. The trade agreement with the Europeans adds 533 million consumers to
the automobile market, in addition to the 300 million in the United States.
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