I 5. Customs union. Consider the industry for product X in country A. Demand is given by p = a Q/ S A, where p is price, Q total output, and SA a measure of market size. Suppose that rms compete a la Cournot and have costs 0 = F + cq. (a) Determine the equilibrium number of rms. Note: if you cannot derive a mathematical answer, explain in words what the equilibrium conditions are. Consider now the industry for product X in country B. Everything is identical to country A, except that market size is twice that of country A: S B = 2 SA. (b) Determine the equilibrium number of rms in market B. How does it relate to the number of rms in country A? What is the relation between rm size in country A and country B? Note: if you can not derive a mathematical answer, do so with words and economic intuition. Suppose that countries A and B, initially in autarky, decide to sign a trade agreement, so that they become effectively a single market of size S 2 SA + 53. (0) Does economic integration lead to rm entry or to rm exit? Also, what does it imply for the average size of each rm? Explain the intuition for the result. Note: if you cannot derive a mathematical answer, do so with words and economic intuition