Question

In: Economics

4. Suppose that fixed cost for a firm in the automobile industry (start up costs of...

4. Suppose that fixed cost for a firm in the automobile industry (start up costs of factories,

capital equipment, and so on) is $5 Billion and that the variable cost is $17,000 for each automobile produced. Because more firms increase competition in the market, the market price falls as more firms enter an automobile industry, or specifically, P = 17,000 + (150/n), where n represent the number of firms in the industry. Assume that the initial size of the automobile industry in the US and UK are 300 million and 533 million people respectively

a. Calculate the equilibrium number of firms in the US market and the European market in

Autarky.

b. What is the equilibrium price in each country?

c. Now suppose the US and Europe decide to trade, which adds the 533 million European demand to the US’ 300 million, how many firms will there be in Europe and the US combined? What is the new equilibrium quantity?

d. Why are prices different in the US in b and c above? Are consumers better or worse off? And why?

Solutions

Expert Solution

Rahul Sunny answered 11 months ago
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