IA NO 90% 4 82 PracticeFinal_EC481F18.pdf (38 6 MI, It 7 DI) INCREASING RETURNS MODEL Assume Argentina is populated by L individuals. These individuals are both consumers and workers. There is only one sector in this economy, let's say the beef sector. Consumer preferences for beef is homothetic. The demand of a representative consumer for beef variety i is given by where Pi is the price of beef i, Q is the aggregated market demand for beef, and P is the beef price index P = [EN, pp-1]*/(-0), b is the demand parameter that determines how substitutable each beef variety is for another (b > 1). The beef sector in Argentina is monopolistically competitive. This means that each beef producer produces a different variety of beef so that they remain price setters for their own variety. Suppose that the production of variety i beef is given by Qi = Li - F where Qi is the amount of variety i beef produced, Li is the total number of workers required to produce this variety, and F is the cost of a factory where the workers work in to produce measured in number of workers. The firm that produces beef variety i faces the total cost function TCi = w(Qi+ F) where w is wage paid to the workers. The marginal cost of production here is MC; = w while the fixed cost of production is Fi = F. Note that all firms pay the same marginal cost and fixed cost of production. 15. Assume each firm takes market demand Q and average price P as given. What is the demand curve for the firm that produces beef variety i? What is the total revenue and marginal revenue for this firm? 3271 6 W MacBook Air3 1 8 1 80* [ 4] . Practice Final ECABIF 18 pot ( 3 8 In , # 7 5 ) 16 . Write down the profit function for the firm that produces beef variety t . What is the profit maximizing condition ? What is the price that the firm will charge EC 481 / 581 Practice Exam Prof . Woan Foong Won 17 . In monopolistic competition , there is free entry and exit in the beef sector so that beef producer profits are zero in equilibrium . How much would firm i produce ( its output ) ? What is the number of workers that each firm will hire ? $ 615 GO90% 43 PracticeFinal_EC481F18.pdf (38 7 Ju, It 7 D) Q 15 18. The labor market clearing condition equates the total number of workers demanded by firms to the total supply of workers: If_ Li = L. Using this and the equilibrium number of workers hired, solve for the equilibrium number of firms in the market (N). Is it increasing or decreasing in Argentina's population? Is it increasing or decreasing in the factory cost? 19. Use the equilibrium price charged by firm i to derive an expression for real wage, , Assuming that firms are identical, P = [EN, pp-1]1/d-b) = P;/N1/(b-1). What is the relationship between real wage and Argentina's population? 20. Now suppose that Argentina opens up to trade with a foreign country that is identical except for its labor supply L*. What happens to output per firm and the number of firms? What happen to real wages? 3213
