SHOW WORK:

b. From the result in question a, calculate the equilibrium price of automobile in U.S. market under autarky. [Hint: use information in either PP curve or CC curve and value of calculated in part a]

c. Now, suppose that the United States and Europe decide to engage in free trade in automobile. Calculate the new equilibrium number of firms and price in the world market? [Hint: replicate steps in part a and b with the new market size being equal to sum of each individual country]

d. Why are prices in the United States in part b different from the world price in part c? From results in part c, how do American consumers be better off with free trade in this model?

Question 2(20%) : Suppose that the fixed cost for a firm in the automobile industry (start-up costs of factories, capital equipment, and so on) are F=$5 billion and that the marginal cost is c=$17000 for each additional unit of automobile produced. Because more firms increase competition in the market, the market price falls as more firms enter the automobile market, or specifically the equation for our PP curve is given by P=17000+n150, where n represents the number of firms in a market. Assume that the initial size of the U.S. and the European automobile consumer markets are 300 million and 533 million units of automobile, respectively. a. Write down the equation for the CC curve and calculate the equilibrium number of firms in the U.S. automobile markets under autarky (without trade). [Hint: the general formula for CC curve is: AC=c+nsF ]