Customs union. Consider the industry for product X in country A. Demand is given by p = 200 Q/SA, where p is price, Q total output, and SA is a measure of market size. Let SA = 1. Suppose that firms compete a la Cournot and have costs C = 100 + 50 q.

(a) Determine the equilibrium number of firms.

Consider now the industry for product X in country B. Everything is identical to country

A, except that market size is four times that of country A: SB = 4 SA and SA = 1.

(b) Determine the equilibrium number of firms in market B. How does it relate to the number of firms in country A? What is the relation between firm size in country A and country B?

Suppose that countries A and B decide to sign a trade agreement, so that they become effectively a single market of size S = SA + SB .

(c) Does economic integration lead to firm entry or to firm exit? Also, what does it imply for the average size of each firm?