Question

Firms in Home are heterogeneous and differ only in terms of their marginal costs. Firm i will have marginal cost of ci that can lie in the interval of (0,6). Firms in Home face the following demand function:

Pi =5?0.1Qi
Starting production is costly. Firms must pay fixed cost of F = 10 to learn their marginal

cost such that their total cost function can be represented as: TCi =F+ciQi

a) Characterize firms that will decide to produce and sell to consumers in Home.

b) Suppose that conditional on operating in Home, firms could also export to Foreign where demand is identical. If a firm decides to be an exporter, it must pay t = 3 in trade costs for each unit of output that it sells to Foreign. Characterize firms that will become exporters.

c) Suppose that firms could also do FDI: set up a plant in Foreign for a fixed cost of FF DI = 37.5 and avoid paying trade costs. Characterize firms that will choose to do FDI.

d) Graph an interval from 0 to 6. Clearly label firms that will decide not to produce at all, serve only Home, serve Home and export to Foreign, serve Home and do FDI in Foreign. Describe the pattern.

Answer 1