Question
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.
Homework Answers
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