This question provides an illustration using China and India as an example of how two countries...

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This question provides an illustration using China and India as an example of how two countries with the same technologies and endowments can gain from trade. This is based on the monopolistic competition model (Krugman model) and we focus on a specific industry: the car industry. The two countries differ only in their market size, with China being larger than India. The first two parts describes each country in Autarky, while the last part describes what happens when the two countries form a single market. (1) Initially, in China, the demand for a specific brand is characterized by: Q = SCHN | - b(P - P)] where the size of the Chinese market is SCHN=14.4 million cars, and where the sensibility to prices is b=0.01. a. What is the marginal revenue MR depending on the price P and quantities Q of cars produced by a single firm? b. Using MR=MC=c and your answer to question 1, and the fact that all firms are identical in equilibrium, find a relationship between the price P and the number of firms N. (PP curve) In a few words, explain why the PP curve is downward sloping. c. Now, regarding costs, we assume a constant marginal cost c = $1,000 per car. On top of that, there is a fixed cost F = $10,000,000 of setting up a new brand of car. All firms have the same costs. What is the average cost depending on quantities Q of cars being produced by a firm? Then, given that we have an equilibrium where all firms have the same size, what is the average cost depending on the number of firms in the industry? (CC curve) d. Long run equilibrium: use the CC and PP curves to solve for the Autarky equilibrium price PEHN and number of varieties NCHN in China. e. What is the production of cars QCHN in each brand in the Autarky equilibrium? This question provides an illustration using China and India as an example of how two countries with the same technologies and endowments can gain from trade. This is based on the monopolistic competition model (Krugman model) and we focus on a specific industry: the car industry. The two countries differ only in their market size, with China being larger than India. The first two parts describes each country in Autarky, while the last part describes what happens when the two countries form a single market. (1) Initially, in China, the demand for a specific brand is characterized by: Q = SCHN | - b(P - P)] where the size of the Chinese market is SCHN=14.4 million cars, and where the sensibility to prices is b=0.01. a. What is the marginal revenue MR depending on the price P and quantities Q of cars produced by a single firm? b. Using MR=MC=c and your answer to question 1, and the fact that all firms are identical in equilibrium, find a relationship between the price P and the number of firms N. (PP curve) In a few words, explain why the PP curve is downward sloping. c. Now, regarding costs, we assume a constant marginal cost c = $1,000 per car. On top of that, there is a fixed cost F = $10,000,000 of setting up a new brand of car. All firms have the same costs. What is the average cost depending on quantities Q of cars being produced by a firm? Then, given that we have an equilibrium where all firms have the same size, what is the average cost depending on the number of firms in the industry? (CC curve) d. Long run equilibrium: use the CC and PP curves to solve for the Autarky equilibrium price PEHN and number of varieties NCHN in China. e. What is the production of cars QCHN in each brand in the Autarky equilibrium?

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a To find the marginal revenue MR depending on the price P and quantities Q of cars produced by a single firm we need to differentiate the demand equa... View the full answer