(a) State the profit maximisation problem for a given firm i and find the optimal price the firm charges when selling their output in market k.(b) Explain what determines whether a given firm i chooses to export its output to Foreign or not. (c) Suppose that τ^(σ-1)fX > fD. Provide an economic intuition for this condition. What implications does this condition have for the size and productivity premium of exporters relative to firms that only selldomestically? Are these predictions supported by empirical evidence? Consider an industry operating under monopolistic competition, in which each firm produces a unique differ-entiated product. Firms in this industry can sell their output in two markets, Home (H) and Foreign (F).The demand curves that firm i faces in each market are:qiHqi Fwhere A is a measure of market size and o> 1 is the elasticity of demand.Each firm i has a productivity level 0; that takes values over the interval (0,0], and produces its output usingthe production function:=АранApiFqi(1)(3)where li denotes the labour used in production by firm i. In order for a firm based at Home to sell its outputdomestically it needs to incur a fixed cost fp, and if it chooses to export it needs to incur a fixed cost fx, bothof them denominated in units of labour. Additionally, a firm based at Home that wishes to export its outputto Foreign incurs an 'iceberg' transport cost 7 > 1. That is, in order to sell one unit of output in Foreign, itneeds to ship 7 units from Home.= Oili,

Domestic demand functionqiH=APiH-σForeign demand functionqiF=APiF-σqi=θiliA---Market sizeσ--…

Answered: Consider an industry operating under…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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(a) State the profit maximisation problem for a given firm i and find the optimal price the firm charges when selling their output in market k.

(b) Explain what determines whether a given firm i chooses to export its output to Foreign or not.

(c) Suppose that τ^(σ-1)fX > fD. Provide an economic intuition for this condition. What implications does this condition have for the size and productivity premium of exporters relative to firms that only sell
domestically? Are these predictions supported by empirical evidence?

Consider an industry operating under monopolistic competition, in which each firm produces a unique differ-
entiated product. Firms in this industry can sell their output in two markets, Home (H) and Foreign (F).
The demand curves that firm i faces in each market are:
qiH
qi F
where A is a measure of market size and o> 1 is the elasticity of demand.
Each firm i has a productivity level 0; that takes values over the interval (0,0], and produces its output using
the production function:
=
Аран
ApiF
qi
(1)
(3)
where li denotes the labour used in production by firm i. In order for a firm based at Home to sell its output
domestically it needs to incur a fixed cost fp, and if it chooses to export it needs to incur a fixed cost fx, both
of them denominated in units of labour. Additionally, a firm based at Home that wishes to export its output
to Foreign incurs an 'iceberg' transport cost 7 > 1. That is, in order to sell one unit of output in Foreign, it
needs to ship 7 units from Home.
= Oili,

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