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Unformatted text preview: Econ 370 Fall 2011 International Trade Professor Soderbery Practice Questions Final: December 14 th Monopolistic Competition in Differentiated Goods and International Trade 1. Consider a model of monopolistic competition and trade in differentiated goods. Suppose Home demand for each variety is given by ! ! = ! 1 ! − ! ( ! − ! ) , and the firm’s cost function be given by ! ! = ! ∗ ! + ! . Suppose the economy is characterized by the following parameters S=360, b=2, F=5, c=1/2 a. In autarky what is the long run equilibrium number of firms ( ! ! ) in the market? ANSWER: Using the fact that price must equal average cost at the long run equilibrium we set the pricing rule equal to AC and solve for ! ! . (For more details on solving optimal price see the answer key for homework 4.) !"#$%&’ !"#$% = ! + ! !" !"#$%&# !"#$ = ! + ! ! Utilizing the fact that in equilibrium all firms split total demand (S) equally we have q=S/N, which gives us !"#$%&’ !"#$% = ! + 1 !" !"#$%&# !"#$ = ! + !" ! Setting Price equal to cost and solving for N give us the following. ! ! = ! !" = 360 10 = 6 b. In autarky what is the price changed by all firms? ANSWER: ! ∗ = ! + 1 !" = 1 2 + 1 12 Econ 370 Fall 2011 International Trade Professor Soderbery c. Show your solution to (a) and (b) graphically using the PP and CC curves. What are firms profits at ! ! ? !! = ! + 1 !" , !! = ! + !" ! Now suppose we allow trade with 3 other countries of exactly the same size, and technology, meaning in autarky ! = ! ! ! ∗ and ! = ! ! ! ∗ . Where ! ∗ and ! ∗ are the sum of all three foreign countries firms and demand....
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 Fall '08
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 Economics, Monopolistic Competition, International Trade, Professor Soderbery

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