Problem 2 Monopolistic Competition and Intra Industry Trade Suppose that the market for motorcycles is characterized by monopolistic competition, and that there are nine identical countries in the world that producemotorcycles Takethe following assumptions as given The initial size of each country's market is S i 1,000,000 (motorcycles sold) All firms in each country have identical cost structures and symmetric demand curves, so that they set the same price and share the market equally Hence each firm sells 1,000,000 n i , where n i represents the number of firms in country i The fixed costs of production for a firm in the motorcycle industry are F $100,000,000 and the variable cost per finished motorcycle ( constant marginal cost) is equal to c $1,000 Under autarky, the market price in each country is given by P i c 900 n i Calculate the equilibrium number of firms ( n i ) in each country's market without trade Calculate the autarky equilibrium price of a motorcycle in each country Now suppose that the nine countries form a free trade agreement for motorcycles, so that their markets are completelyintegrated Calculatethe equilibrium number of firms in the integrated world market ( n world ) Calculate the free trade equilibrium price of a motorcycle Briefly explain why production is more efficient under free trade Is it related to the presence of increasing economies of scale Are there more companies operating in the integrated market equilibrium

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 25, 2024

Problem 2: Monopolistic Competition and Intra-Industry Trade Suppose that the market for motorcycles is characterized by monopolistic competition, and that there are nine identical countries

Problem 2: Monopolistic Competition and Intra-Industry Trade

Suppose that the market for motorcycles is characterized by monopolistic competition, and that there arenine identical countriesin the world that producemotorcycles.Takethe following assumptions as given:

The initial size ofeachcountry's market isS_i= 1,000,000(motorcycles sold).
All firms in each country have identical cost structures and symmetric demand curves, so that they set the same price and share the market equally.Hence each firm sells1,000,000/n_i, wheren_irepresents the number of firms in countryi.
The fixed costs of production for a firm in the motorcycle industry areF =$100,000,000and the variable cost per finished motorcycle (= constant marginal cost) is equal toc= $1,000.
Under autarky, the market price in each country is given by:P_i= c +900/n_i.

Calculate theequilibrium number of firms(n_i*) ineachcountry's marketwithouttrade.
Calculate theautarky equilibrium priceof a motorcycle in each country.
Now suppose that theninecountries form a free trade agreement for motorcycles, so that their markets are completelyintegrated.Calculatetheequilibrium number of firmsin theintegrated worldmarket(n_world*).
Calculate thefree trade equilibrium priceof a motorcycle.
Briefly explainwhy production is more efficient under free trade. Is it related to the presence of increasing economies of scale? Are there more companies operating in the integrated market equilibrium?