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: Аран APAF (1) (2) qiH = QiF= 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: qi = Oili, (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 fn and if it chooses to export it needs to incur a fixed cost fy both
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: Аран APAF (1) (2) qiH = QiF= 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: qi = Oili, (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 fn and if it chooses to export it needs to incur a fixed cost fy both
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter10: Monopolistic Competition And Oligopoly
Section: Chapter Questions
Problem 11PAE
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Question
(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?
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