05 Jun Question 1. The Monopolistic Competition
Question
1. The Monopolistic Competition Model (35 points). Suppose that (1) fixed costs for a firm in the automobile industry are $5 billion, (2) variable costs are $17,000 per finished vehicle, (3) the market price is given by P = 17,000 + (150/n) where n is the number of firms in the market, (4) the autarky market size for the U.S. is 300 million, and (5) the autarky market size for Europe is 533 million.
a. Calculate and use Monopolistic Competition Model diagrams to clearly and accurately show (1) the equilibrium number of firms and (2) the price of automobiles in the U.S. and in Europe before any international trade takes place. These diagrams should be drawn in BLACK.
b. Show your calculations of the equilibrium number of firms and the price of automobiles in both the U.S. and Europe and provide a brief economic explanation of the results you have shown in your diagrams in part a.
c. Calculate and use a Monopolistic Competition Model diagram to clearly and accurately show (1) the equilibrium number of firms and (2) the price of automobiles in the combined U.S. and Europe market once free international trade takes place. This diagram should be drawn in BLACK.
d. Show your calculations of the equilibrium number of firms and the price of automobiles in the combined U.S. and Europe market and provide an economic explanation of the results you have shown in your diagram in part c.
e. Provide an economic explanation of how the opening of free international trade affects U.S. consumers of automobiles. Be sure to explain why.
f. Provide an economic explanation of how the opening of free international trade affects U.S. producers of automobiles. Be sure to explain why.
YOU MAY FIND ORIGINAL SOLUTIONS FROM UGBA 118 INTERNATIONAL TRADE UC BERKELEY WITH PROFESSOR STEVEN WOOD.
Name: _________________________
(Last name, first name)
SID: _________________________
GSI: _________________________
UGBA 118: International Trade
Professor Steven Wood
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