Assignment 6: The Monopolistic Competition Model (10 points + 1 bonus point) Consider two countries, home (H) and foreign (F) with the same technology for producing private jets. Each firm has the cost function: TC = F +cQ. where c = 5 and F = 1200. The demand function faced by each firm is: Q =s[=- b(P - P)]. Where b = 1/1200. The home producers sell 900 private jets per year and the foreign producers sell 1600 private jets per year. The marginal revenue function of each firm is: MR = P - 1. What happens if firm i in home market sets a price higher than the price of other firms? Will it lose all its customers? (1 points) 2. Derive the Home autarky equilibrium. Specifically, calculate the equilibrium number of private jet producers, the equilibrium price of a private jet, and the equilibrium number of jets produced by each jet producer. (2 points) 3. Derive the Foreign autarky equilibrium. (2 points) 4. Derive the free trade equilibrium when Home and Foreign enter a free trade agreement. (2 points) 5. Based on your calculations above, outline the gains from trade in Home and Foreign. (1 points) 6. Suppose that due to a recent tragic accident, private jet buyers' demands shift from Home producers to Foreign producers. Analyze the effect of this demand change on the number of firms (varieties) and on the location of these firms. No calculation is needed. (1 points) Page 1 of 2 ECN 465 Assignment 7. With the advancements in technology, smaller producers start entering the private jet industry. The new private jets industry features heterogeneous firm productivity. On the graph below, illustrate the effect of trade on the private jet industry. (1 points) Operating Profit Marginal cost, c (Bonus question) Recall that one important assumption in the monopolistic competition model is that a irm ignores its rivals' reactions when choosing its own price. In other words, firms' pricing decisions are independent. With extremely high entry costs, a more realistic market structure in the private jets industry is that there are a handful of firms, and their pricing decisions are interdependent. More specifically, the demand function facing firm i is: Q1 =S =-b(P, - P(PD)]. Note that now the average price of the firm's rival is not a function of the firm's price. Analyze the difference between this industry equilibrium and an industry equilibrium where firms' pricing decisions are independent. (1 points)