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Consider   the   monopolistic   competition   model   of   increasing   returns   to   scale   studied   in   class.   Consid

Consider   the   monopolistic   competition   model   of   increasing   returns   to   scale   studied   in   class.  
Consider   two   countries,   Canada   and   the   US.   The   market   size   in   Canada   is   S(CAN) =   90   and   the   market   size   in   the   US   is   S(US) =   160.   The   responsiveness   of   consumers'   demand   for   this   variety   to   price   deviations   from   the   average   market   price   is   given   by   a   constant,   b =   1.   Each   firm's   total   cost   is       TC(q)   =   c*q +   F    where   marginal   cost   is   c =   5   and   fixed   cost   is   F =   10.  

Part A. Assume that these countries do not trade with each other.
a)   Write   an   expression   for   each   firm's   average   cost   as   a   function   of   the   number   of   firms,   n.  
b)   Find   an   expression   for   the   price   as   a   function   of   the   number   of   firms.  
c)   Solve   for   the   equilibrium   number   of   firms,   n and   the   price   level   in   each   country.  
Part B. Assume that there is free trade between these countries.
d)   Solve   for   the   equilibrium   number   of   firms,   n(CAN‐US),   that   we   will   have   in   total   in   the   region   formed   by   Canada   and   the   US   combined.   Find   the   price   level   in   each   country.  

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