1. Consider production of computers. Suppose all firms are symmetric and that

• Fixed costs for a firm in the computer industry are 10 million.
• Variable costs are 50 per finished computer.

a)Derive and draw the average cost function for produced computers.

b)In the market for computers we cannot have perfect competition. Explain why.

c)Assume that he market for computers is monopolistically competitive. What is monopolistic competition?

d)In each country, each firm faces the demand function: Q=S[1/n-b(P-P*)], where

Q is the quantity demanded

S is the size of the market

n is the number of firms in the market

P is the price charged by the individual firm P* is the average price in the market

b is a constant parameter

If a firm charges the price P=P*, how many computers does the firm sell?

e)Suppose that all firms charge the price P=P*. Derive the average cost as a function of S and n. Explain the role of S and n.

Consider the market for computers in the European Union. Assume that:

• The market price is given by P=50+50/n where n is the number of firms in the market.
• The autarky market size, S, in EU is 20 million.

f)Use this information and the information about the average cost function to solve for the equilibrium number of firms and the equilibrium price in the EU. Derive the equilibrium algebraically, and draw it in the standard graph for monopolistic competition. Label axes, curves and intersections in your graph.

g)Now suppose that the UK leaves the EU and that the UK goes into autarky. After Brexit the UK market for computers is 5 million. Solve for the number of firms and the market price in the UK after Brexit.