Question

Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital equip- ment, and so on ) are $2,000,000 and that marginal costs are equal to $5,000 per finished automobile. Because more firms increase competition in the market, the market price falls as more firms enter an automobile market, or specifically, P=5,000+(200/n), where n represents the number of firms in a mar- ket. Assume that the initial size of the Korean and the Japanese automobile markets are 12,000,000 and 13,000,000 consumers, respectively. Assume all firms are symmetric in the sense that they have access to the same production technology. Suppose one consumer buys one car. Now suppose that Korea decides on free trade in automobiles with Japan. The trade agreement with Japan adds 13,000,000 consumers to the automobile market, in addition to the 12,000,000 in Korea. Hint: When firms are symmetric, average cost is given by AC = c + F n

(a) (10 points) How many automobile firms will there be in the integrated equilibrium (Korea and Japan combined)?

Answer 1