Suppose the market for cars is characterised by monopolistic com- petition. A firm i has a marginal cost of b; per car produced, and a fixed cost K. Suppose that per capita demand for firm i's cars is given by Ci =3 Pi where w is the wage and p; the price for firm i's variety. The labour force in Home is L and aggregate demand for i's cars in Home is y? = Lc;. Firms act as price setters. a) Derive the optimal price a firm will set as a function of b;. What is the maximum marginal cost b for a firm to have positive profits? Explain. b) Home now introduces free trade in cars with Foreign with iden- tical labour force L and per capita demand c;. Suppose that all firms in Home and Foreign have the same marginal cost b < b and make zero profits. Derive the equilibrium consumption de- mand for each firm and the number of active firms in Home with and without trade. Compare and explain. c) Suppose now that firms' productivities differ, i.e. b; # bj, and that there are fixed costs KX for exporting to another country. Suppose that K* > 2K. What are the effects of international trade on domestic firms now (which firms will exit, export, etc.)? Compute or explain.

Suppose the market for cars is characterised by monopolistic com- petition. A firm i has a marginal cost of b; per car produced, and a fixed cost K. Suppose that per capita demand for firm i's cars is given by Ci =3 Pi where w is the wage and p; the price for firm i's variety. The labour force in Home is L and aggregate demand for i's cars in Home is y? = Lc;. Firms act as price setters. a) Derive the optimal price a firm will set as a function of b;. What is the maximum marginal cost b for a firm to have positive profits? Explain. b) Home now introduces free trade in cars with Foreign with iden- tical labour force L and per capita demand c;. Suppose that all firms in Home and Foreign have the same marginal cost b < b and make zero profits. Derive the equilibrium consumption de- mand for each firm and the number of active firms in Home with and without trade. Compare and explain. c) Suppose now that firms' productivities differ, i.e. b; # bj, and that there are fixed costs KX for exporting to another country. Suppose that K* > 2K. What are the effects of international trade on domestic firms now (which firms will exit, export, etc.)? Compute or explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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