! 5. Suppose a firm has fixed cost f of setting up the production line and variablecost e per unit of finished product. A number of firms can enter the market, and eachfirm has unique product imperfectly substitutable with other products. The demand forindividual firm's product is given byEPp?where p, is the price charged by this firm and q is the quantity sold. P is the overallprice index, which depends on the umber of firms n and prices all the firms charge. Itis equal to P = EP and each individual firm takes its level as given when makingpricing decision. Firms maximize profits and the etry to the market is free. Find theequilibrium number of firms on this market as a function of parameters f, c, o and E.Remark 1: Note that EP.q = EP = E, thus, E represents overall expenditurej=iof consumers for the industry products.Remark 2: One can derive this demand function if one assumes that consumer'spreferences are described by the Constant Elasticity of Substitution utility function:U =with o being the elasticity of substitution between goods.i=1

Profit maximization is an essential idea in economics and commercial enterprise, representing the…

Answered: mperfectly substitutable

Business

Economics

mperfectly substitutable

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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