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2. Consider an automobile industry in Britain that produces differentiated varieties of cars. The demand faced by each (differentiated) car manufacturer is given by Q =5x 2,506 * (P- P) () where Q is the quantity of cars sold by the firm, 5 are total sales (in quantity terms) of cars in the industry, " is the number of firms in this industry, P is the price charged by the firm itself, and P is the average price charged by its competitors. All firms in the industry face a constant marginal cost 26, 000 per car produced, as well as initial fixed cost of [10,000,000 that needs to be incurred regardless of the number of cars produced. Assume that there is free entry in this market. Initially, Britain does not open up for trade, and the total demand for cars is capped at 5 = 100,000. (a) Derive the values of it and P in a long-run symmetric equilibrium for Britain. Show all the relevant steps. (14 points) Suppose that Britain opens up to trade and the demand for British cars 5 increases to 256,000. For now, we focus on the short-run effects where the number of firms remains unchanged. (b) Calculate the short-run profits after Britain opens up to trade. How did it change compared to (a) and what caused this change? (6 points) (c) Suppose that foreign customers have a lower demand elasticity than British customers and you cannot price discriminate between customers in Britain and abroad. How would the profit-maximising price change? (max. 210 words; 5 points) Consider a more realistic scenario where (1) each car manufacturer in Britain has a different marginal cost, and (B) there exists trade costs between Britain and the rest of the world. (d) Suppose that you have access to data on all bilateral trade flows of cars and all bilateral trade barriers in the world in 2019. How should you consistently estimate the trade elasticity (Le. the percentage change in exports for a one percentage change in trade cush]? (max. 300) words; 10 points) (e) British car manufacturers also had an option to use components from suppliers in either China or Britain in their production process, as well as an option to integrate with their sup- pliers as well. Recently COVID-19 has unfortunately disrupted freights and transportations of components from abroad. Do you expect productive or non-productive car manufactur era in Britain to be affected most from such a disruption? Explain your arguments carefully. (max. 400 words; 12 points)