In a country there is an industry characterized by monopolistic competition. Number of companies in the industry is denoted by n. The companies have identical cost functions. The average cost (AC) for each company is given by , where F is each firm's fixed cost; S isthe industry's total production level and c is the marginal cost for each company. The price (P) each companies in industry sets are given by  , where c is again the marginal cost (b is one sensitivity parameters whose numerical value we take for granted; see below)

3a. Assume initially that the country does not trade with the outside world and that F = SEK 100,000 per period; S = 529,000 units per time period; c = SEK 390 per unit and b = 0.01. Calculate price and average cost per company if the number of companies is 50 (include two decimal places if necessary).

3b. No calculations are required to answer this question. So you should not calculate something here (economic reasoning only)! What do you think will happen in the market given your answer in sub-task 3a? If so, how is price and average cost affected?

3c. (You should not solve this task to answer sub-task 3b!) Determine the number of companies and the economic gain per company in equilibrium under autarchy.

3d. Now open up the country to trade with the outside world. This is reflected in the fact that S (industry total production level) increases to 1,024,000 per time period (all other relevant parameters retains its values). How many companies are there in equilibrium on the integrated the world market? By how much does profit increase per company?
 
 

Transcribed Image Text:

F AC = nx=+c, S F AC = nx=+c, S

Answer rating: 100% (QA)

3a Price per company SEK ... View the full answer