Question 2 20 marks (4+2+4+2+3) AtI-Iome country, the industry of canned tomato is amonopolistically competitive industry where all rms are identical, except for the fact that they produce slightly different varieties of canned tomato. When the rms in this industry increase production by one unit, their total cost increases by $12, irrespective ofthe total quantity ofproduction. At zero production, the rms in the industry would incur a total cost of $3,000. a. [4 marks) Now assume that each rm in the industry has the same market share, so the quantity oftomatno cans that each rm produces (qi) is equal to the total sales in the market (5) divided by the number ofparticipating rms (7:). Q's = 5/\"| Total sales in the market (3) are equal to $30,000. Derive the rms' average cost to show thatthe average cost curve [CC)is givenby: CC Curve:AC = 0.1 - n + 12. b. (2 marks) The demand side ofie canned tomato market is represented by the following PP curve, which summarises price competition in the industry. PP Curve: p = 30 0.3 - n. Illustrate the CC curve and the PP curve on a graph with price and cost on the vertical axis, and the number afrms n on the horizontal axis. Solve for the market equilibrium at Home in antarky, that is, nd the equilibrium number of producers is and the equilibrium price p of canned tomato. c. (4 marks) Suppose that Home is now able to trade with two other identical countries. Solve for the trading equilibrium in the industry and illustrate this change in trading equilibrium on a graph (this new graph is based on the graph you drew in point (13), with the addition of the change in equilibrium after trade). (1. [2 marks) Explain the effects oftrade on the industry oftomato cans. e. [8 marks) Now imagine a scenario where rms in the industry ofcanned tomato at Home also differ in terms ofieir productivity, that is, marginal cosh; are di'erent across rms. Consider the following graph representing two of the rms participating in this market at Home in atttarlry. Price, Gust Din-off om (cw) Note that both rms face the same demand curve (D). The slope of D is given by: 1 SXEJ Demand curve slope: \\VheIe 5' is the size ofthe market and b is a parameter that indicates the sensitivity ofa frrm's demand to changes in the rm's & Assume that Home now opens to free trade under this new scenario. Use the graph above (you could redraw it by hand ifyou preferred) to show the effect oftrade on this market. Briey explain how trade may a'ect rms diE'erently, depending on their level of productivity