Ask Business Economics Expert

Assume the gizmo industry is monopolistically competitive, with economies of scale. Total market size (S) in the Home country is a fixed 5 million gizmos, and each firm has a fixed cost (FC) of $10 million and a constant marginal cost of $100. For every $1 a firm charges below the average price (AvgP) of its competitors, its market share increases by 0.5%. Thus, the firm’s demand curve can be written as Q = S×(1/N + B×(AvgP – P)), where B = 0.005. a) How do we solve for the firm’s price? First, solve the firm’s demand curve for P = AvgP + [1/(B×N) – Q/(B×S)], multiply by Q to get the firm’s revenue, and then take the derivative with respect to Q to solve for MR = P – Q/(B×S). Or, you could read my notes on the model math. Then set this equal to the marginal cost of $100, replace Q/S with 1/N, and solve for P as a function of N. Using the numbers given above, solve for P as a function of N. Graph this. b) The firm’s average cost equals its average fixed cost plus its average variable cost, or AC = FC/Q + MC. Because this is falling with Q, we conclude the firm has economies of scale. Now replace Q with S/N, and solve for AC as a function of N. Using the numbers given above, solve for AC as a function of N. Graph this. c) Under monopolistic competition, firms will enter the market if P > AC, and exit if P < AC. Solve for the equilibrium number of firms by setting P = AC. Remember that if the optimal number is not an integer, you should round down. Using the numbers above, solve for the optimal number N of firms, the firm's market price P, and the average cost AC. Graph this. What is the output Q of the average firm? d) For the typical firm, calculate profit = Q(P-AC), and total industry profits as S(P-AC). I suggest you use Excel or a good calculator so you don’t make rounding errors. If profit is nonzero, how is this possible? e) Now, assume that the Home country opens up to trade with a neighboring country with a similar industry, with an identical cost structure. The foreign country’s total market size is 3 million gizmos, but other things remain the same. Solve for the optimal number of firms in the foreign market at autarky, the foreign autarky price, and the foreign average cost. Graph this. What is the output of the average foreign firm, and the profit of the typical foreign firm? f) Now, combine the autarkies into one market with a quantity-demanded of 8 million gizmos. Solve for the new free trade price, the equilibrium number of firms, and the average cost. g) What is the equilibrium output of the average firm under free trade, and what is the profit of the typical firm under free trade? Calculate the change in producer surplus as the difference in total industry profits between autarky and free trade. h) Calculate the change in consumer surplus in each country as the total quantity-demanded times the change between the autarky and free-trade prices. What is the total consumer gain from trade? How does this compare to the change in total producer surplus? i) Assume that in the short run, firms in both countries are unable to adjust output and do not shut down, but prices change in response to the increased competition. Solve for the short-run price if the combined number of firms stays the same as in autarky, and then solve for the losses of the typical home firm and the typical foreign firm. How many firms must shut down overall to reach the new equilibrium?

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M92203321

Have any Question?


Related Questions in Business Economics

Standards drive instruction therefore how do standards

Standards "drive instruction," therefore, how do standards influence curriculum planning?

Explain how the application of the pdca cycle can support a

Explain how the application of the PDCA cycle can support a competitive strategy of low cost leadership.

Ford motors expects a new hybrid-engine project to produce

Ford Motors expects a new? Hybrid-engine project to produce incremental cash flows of $ 95 million each year and expects these to grow at 4?% each year. The upfront project costs are? $900 million and? Ford's weighted av ...

A five-year bond with a yield of 11 continuously compounded

A five-year bond with a yield of 11% (continuously compounded) pays an 8% coupon at the end of each year. a) What is the bond's price? b) What is the bond's duration? c) Use the duration to calculate the effect on the bo ...

Image manufacturing is an electronics manufacturer and

IMAGE Manufacturing is an electronics manufacturer and retailer. Its main products are Ultrabook computers, PCs and calculators. The current price of the Ultrabook is $ 600, the PC is $700 and the calculator is $30. This ...

According to kulish what is about the design of the euro

According to Kulish, what is about the design of the euro currency that lessens its appeal compared to prior national currencies?

How has the value of the euro changed compared to other

How has the value of the Euro changed, compared to other countries, over the past 10 years (since the Great Recession began)?

In lecture we discussed why the production possibilities

In lecture we discussed why the production possibilities frontier (the boundary of the production possibilities set) is bowed 'outwards'. When might the production possibilities set be bowed 'inwards'? Give an example of ...

In 2013 gallup conducted a poll and found a 95 confidence

In 2013, Gallup conducted a poll and found a 95% confidence interval of the proportion of Americans who believe it is the government's responsibility for health care. Give the statistical interpretation. I do not underst ...

The standard deviation of the number of video game as

The standard deviation of the number of video game A's outcomes is 0.5479, while the standard deviation of the number of video game B's outcomes is 0.2498. Which game would you be likely to choose if you wanted players t ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As