Consider two identical countries, Home and Foreign. In each country several varieties of cars are produced by identical car manufacturers. In each country each car manufacturer faces the following demand Q for its own variety of car that depends on the size of themarket for cars, 2000 (total cars demanded), the price charged per variety p relative to the average price p of other cars and the number of varieties available in the market, n: Q= (p^-2/n)*2000p

Therefore each manufacturer is a monopolist in its own variety, but the demand for its variety depends on other varieties available as well. Each firm can produce a variety by paying a fixed cost of 5 (to set up a plant) and a constant marginal cost of 1 for each car.The market is characterized by free-entry therefore in the long run profits are driven to zero.

1.Derive and explain the equilibrium conditions that we use to find the pricep and the number of firms n in equilibrium. (marginal revenue = 0.5 Q^-0.5 (2000p/n) )

2.Consider each country in autarky. What is the number of firms/varieties n in equilibrium? What is the price p of each variety of car.

3.Now the two countries are allowed to trade. What is the number of firms in each country in the long run? How many varieties can each consumer (in either the Home or the Foreign country) buy? What is the price per car when the countries are allowed to trade?