The chapter is Increasing Returns to Scale and Monopolistic Competition, for the course, International Trade, Econ 433.

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3. Monopolistic Theory Assume the consumer has the following linear demand, Q = A P / 3. Assume the total costs ofthe rms are equal to C(q) = c a: q + F. a. Write down the equation of the rm's prots. b. Find the monopolists quantity and price and compare it to the price and quantity set by a rm under perfect competition. Include a graph with the Q\" and PM . In a graph, show what are the prots of a monopolistic rm. d. Explain under what conditions does monopolist's prots are zero. .0 4. Trade under Monopolistic Competition Consider the model presented in class, where a firm's demand is given by the following 9 (P) = S /N - 5 ( P - P)] . and the firm's cost function be given by C(q) = c * q +F. Suppose the economy is characterized by the following S=50, b=4, F=2, c=1/2. a. Assume that initially there are 5 firms (N=5), find the price charged and quantity sold by each firm, as well as the average price level and profits (if any) made by each firm. Be sure you show the entire derivation. b. Show your solution to (a) graphically. c. Now assume there is free entry of firms into this market. Will firms choose to enter or exit the market, why? d. Find the equilibrium number of firms in the long run and show (analytically and graphically) how the optimal price and quantity changes for all firms. e. From the long run autarky equilibrium, show what would happen if this country could trade with an identical country (analytically and graphically, show what happens to prices, sales, firms). f. Fill in the following table: Autarky Trade Number total varieties Number of firms in each country Quantity produced per variety Price g. Describe the gains form trade