Question

Part 4: Model of Trade with Imperfect Competition -- Problem 1.2 (continued from 1.1.) Consider a world with two countries, East and West. These two countries are identical. We are interested in finding out conditions under which there would be trade or not in golf clubs, which we think of as a differentiated good. Assume that the golf club industry is monopolistically competitive, with all firms being homogeneous and having marginal cost equal to c = 2 and fixed cost equal to F = 400 The demand in each market is given by Q = S 1/n - b(P-P)],b=1/100. The size of each market is S = 360,000 Imagine that the two markets are perfectly integrated i.e., can trade with no trade costs). What is the equilibrium price in the integrated market? P=2 P = 2.14 = 2.24 OĚ=3 P = 3.14 OP=3.24

Answer 1

Answer option 3) P = 2.24

At eqm , P = P_bar

So Q = S/n

In integrated world , S' = 360,000+360,000

S'= 720,000

At eqm, P = AC

MC + 1/bn = MC+ FC/Q

Put Q = S/n

1/bn = FC*n/S

S/FC*b = n​​​​​​2​​​

For integrated world

n = √(720,000/400*.01)

= √180,000

n = 100*√18

Eqm P = MC + 1/.01*n

= 2 + 1/√18

= 2.24