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Consider the motorcycle industry. Assume that the fixed costs for each firm to set up its own production of motorcycles is 90 million dollars. Variable

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Consider the motorcycle industry. Assume that the fixed costs for each firm to set up its own production of motorcycles is 90 million dollars. Variable costs are $300 per finished motorcycle. Assume that there are two countries, Alpha (home) and Beta (foreign). The fixed costs ($90 million) and the variables costs ($300) are the same in the two countries. The size of the motorcycle market in Alpha is S = 4.8 million motorcycles and in Beta is S* = 2.7 million motorcycles. In equilibrium, all firms charge the same price and share the total demand (market size) equally among themselves. There is free entry in the motorcycle industry. Firms have market power and charge a price given by the following equation: P = 300 + 4800 a) In autarky (no free trade between Alpha and Beta)), how many firms produce motorcycles in Alpha? [0.5 point] b) In autarky, what is the equilibrium price in Alpha? [0.25 points] c) In autarky, how many firms produce motorcycles in Beta? [05 point] d) In autarky, what is the equilibrium price in Beta? [0.25 points] e) Now assume that Alpha and Beta decide on free trade in motorcycles, so that the size of the integrated motorcycle market is S+S*. This is an instance of what trade model? [0.25 points] f) How many firms produce motorcycles in the integrated market (Alpha + Beta) under free trade? [0.5 point] g) What is the equilibrium price in the integrated market (Alpha + Beta) under free trade? [0.25 points] h) Are consumers better off with free trade in both countries? In what ways? [0.5 point] i) Draw the equations for prices and average costs for Alpha in autarky on a graph with price and average cost on the vertical axis and the number of firms on the horizontal axis. Show the effect of economic integration (free trade) on that same graph. [1 point]

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