Question 3: US/Canada Free Trade Agreement This question asks you to work throw the quantitative implications of integration between two different-sized countries in the monopolistic competition model. The market sizes are SUS = 100 and SCA = 10. Firms in each country can enter the market by paying a fixed cost 1 and produce with a variable cast 1 for every unit produced, so TC(q) = 1+ As in lecture, firms in each country face the demand curve Q = S-(1/N - (P-P)) where S is the market size, N is the number of firms, P is the price charged by the firm and P is the average price charged by all firms. All firms are identical. Note: don't worry about "fractions of firms in your answer. We will interpret these quantities as millions (i.e. 2.5 firms equals 2.5 million firms), but just to keep the notation reasonable we'll use the lower numbers. 1. Find the marginal revenue curve for each country under autarky. 2. Assume that, under autarky, free entry drives profits to zero. Derive the long run equilibrium number of firms in each market, and compute the ratio of U.S. firms to Canadian firms. 3. Derive the scale of firms in each country, i.e. the quantity Q produced by each firm. Which country has larger firms? How much larger are they (i.e. 2 times? 3 times?). 4. Derive the markup of price over marginal cost u = P/c-1 in each market. Which country has larger markups? How much larger are they (i.e. 2 times? 3 times?). Question 3: US/Canada Free Trade Agreement This question asks you to work throw the quantitative implications of integration between two different-sized countries in the monopolistic competition model. The market sizes are SUS = 100 and SCA = 10. Firms in each country can enter the market by paying a fixed cost 1 and produce with a variable cast 1 for every unit produced, so TC(q) = 1+ As in lecture, firms in each country face the demand curve Q = S-(1/N - (P-P)) where S is the market size, N is the number of firms, P is the price charged by the firm and P is the average price charged by all firms. All firms are identical. Note: don't worry about "fractions of firms in your answer. We will interpret these quantities as millions (i.e. 2.5 firms equals 2.5 million firms), but just to keep the notation reasonable we'll use the lower numbers. 1. Find the marginal revenue curve for each country under autarky. 2. Assume that, under autarky, free entry drives profits to zero. Derive the long run equilibrium number of firms in each market, and compute the ratio of U.S. firms to Canadian firms. 3. Derive the scale of firms in each country, i.e. the quantity Q produced by each firm. Which country has larger firms? How much larger are they (i.e. 2 times? 3 times?). 4. Derive the markup of price over marginal cost u = P/c-1 in each market. Which country has larger markups? How much larger are they (i.e. 2 times? 3 times?)
