Suppose that fixed costs for a firm in the truck manufacturing industry (start-up costs of factories, automation chain, etc.) are $1.25 billion, and that variable costs are $1,000 per finished truck. Suppose that the truck market is monopolistically competitive, and firms are identical. Suppose the market price is determined by the equation P=1,000+n100, where n represents the number of firms in the market. Assume that there are three countries in the world: England, Scotland, and Wales, with the market size being 300 million, 250 million, and 100 million, respectively. a. (5 marks) Calculate the equilibrium number of firms in the truck market in England in autarky. b. (3 marks) What is the equilibrium price and the average cost of trucks in England if there is no international trade? c. (5 marks) Now suppose that the three countries join to form a free trade area named LUKMOFTA (literally-the-UK-minus-one-FTA), 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 truck? d. (5 marks) Suppose instead that after a referendum, Scotland leaves the free trade area, so that the free trade area now only consists of England and Wales. At the same time, there is a breakthrough in trucking technology, reducing a firm's fixed cost to $800 million. Calculate the new number of firms, the equilibrium price, and average cost for each truck in this combined market. e. (6 marks) Compare the number of firms and the price that English consumers pay for each truck between the scenarios in (b), (c) and (d). In which scenario would English consumers benefit the most? Explain why. Suppose that fixed costs for a firm in the truck manufacturing industry (start-up costs of factories, automation chain, etc.) are $1.25 billion, and that variable costs are $1,000 per finished truck. Suppose that the truck market is monopolistically competitive, and firms are identical. Suppose the market price is determined by the equation P=1,000+n100, where n represents the number of firms in the market. Assume that there are three countries in the world: England, Scotland, and Wales, with the market size being 300 million, 250 million, and 100 million, respectively. a. (5 marks) Calculate the equilibrium number of firms in the truck market in England in autarky. b. (3 marks) What is the equilibrium price and the average cost of trucks in England if there is no international trade? c. (5 marks) Now suppose that the three countries join to form a free trade area named LUKMOFTA (literally-the-UK-minus-one-FTA), 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 truck? d. (5 marks) Suppose instead that after a referendum, Scotland leaves the free trade area, so that the free trade area now only consists of England and Wales. At the same time, there is a breakthrough in trucking technology, reducing a firm's fixed cost to $800 million. Calculate the new number of firms, the equilibrium price, and average cost for each truck in this combined market. e. (6 marks) Compare the number of firms and the price that English consumers pay for each truck between the scenarios in (b), (c) and (d). In which scenario would English consumers benefit the most? Explain why
