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Question 1. See the numerical example from the lecture slides (Lecture 8 Slides # 39-40). Suppose the two countries were to integrate their automobile market with a third country and a fourth country, which have an annual market for 2 million and 1 million automobiles, respectively. Find the number of firms, the output per firm, and the price per automobile in the new integrated market after trade. Gains from Integrated Market: Numerical Example . Let us illustrate the gains from trade with a specific numerical example. Consider the automotive (car) industry. Characterized by monopolistic competition due to product differentiation Every firm's cars are considered slightly different by consumers in terms of branding, functionality etc. Suppose there are 2 countries: Home and Foreign Home and Foreign are identical in every way - e.g. cost of production for firms, consumer preferences, resource abundance etc. Only differ in market size (not critical consideration) Home Market Size: SH = 0.9 Million cars sold annually. Foreign Market Size: SF = 1.6 Million cars sold annually. Gains from Integrated Market: Numerical Example . Every firm is identical (regardless of where it is based - Home or Foreign) Fixed Costs: FC = 750 Million Marginal Cost: C = 5000/car . Every Firm faces the demand function 1 : Sk s* ( 30000 (P* PK) ) . n Where Sk refers to the size of market k pk is the price firm i charges in market k k is the average price in market k. There 3 possible markets Home (H) and Foreign (F) if there is no trade between the countries The integrated World market (W) if there is trade between the countries. b = in this numerical example. 30000 . 1