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Unformatted text preview: Economics 101 Fall 2010 International Trade Problem Set 2 October 21, 2010 Due: Thu, November 4, before 12:30pm Instructor: Marc-Andreas Muendler E-mail: email@example.com 1 Intraindustry Trade Consider car makers that operate under monopolistic competition in symmetric equilibrium. Each monopolistic car maker produces with a total cost function TC = F + c Q C , where F = 500 , 000 and c = 100. What are the average and marginal cost functions of a car maker? Each of n car makers faces residual demand of Q d C = S [1 /n- b ( P C- P C )] , where S = 50 , 000, b = 1 / 1 , 000 and P C is average equilibrium price. What are marginal revenues? [ Hint : You may use the formula in the textbook. Otherwise, reformulate demand so that P M = P M ( Q d M ) and derive total revenue; differentiate total revenue with respect to quantity.] Graph the average-cost-variety ( CC ) and the price-variety ( PP ) schedules for this industry in a diagram that shows price, average cost and the number of firms (varieties). Find the number of firms (varieties) in this industry in the absence of trade. What is price in a symmetric autarky equilibrium? Cars can be traded across countries at not cost. Using the average-cost- variety ( CC ) and the price-variety ( PP ) schedules above, show how equi- librium price and the equilibrium number of firms change after trade. How could you measure the gains from trade? Explain briefly. 2 Trade with Heterogeneous Firms Consider three car makers that can potentially operate under monopolistic com- petition in equilibrium. There are two completely identical countries. To start operations, a car maker i needs to pay a fixed cost of F = 1 , 250 and can produce at a constant marginal cost of c i . To enter the foreign market, a car exporter needs to pay an additional fixed cost of F X = 312 . 5. To ship an export, a 1 car maker incurs an additional transportation cost of = 1 (100 percent) on...
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