Suppose that fixed costs for a firm in the air-conditioning manufacturing industry (start-up costs of

factories, automation chain, etc.) are $4.9 billion, and that variable costs are $15,000 per finished aircon. Suppose that the air-con market is monopolistically competitive, and firms are identical. More

firms increase competition, and so the market price falls as more firms enter the market, making the

market price to be = 15,000 + 400/, where represents the number of firms in the market. Assume

that there are three countries in the world: Brisbane, Sydney, and Melbourne, with the market size being

200 million, 550 million, and 400 million, respectively.

a. Calculate the equilibrium number of firms and the price of each air-con in Brisbane in

autarky.

b. Now suppose that the three countries join to form a free trade area, and assume no

transportation costs. How many firms will there be in the combined market? What will be the new

equilibrium price, and average cost for each air-con?

c. Suppose instead that a lockdown now closed Melbourne off from the rest of the world, so

that the free trade area now only consists of Brisbane and Sydney. At the same time, summer is

approaching, resulting in the price equation changing to = 15,000 + 450/. Calculate the number of

firms, the equilibrium price, and average cost for each air-con in this combined market.

d. Compare the number of firms, and the price that Brisbane consumers pay for each air-con

between the scenarios in (a), (b) and (c). In which scenario would Brisbane consumers benefit the most,

and explain why