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Analysis of Car Industry Equilibrium and Trade Effects in France and Spain

This exercise explores the dynamics of a monopolistically competitive car industry in France and Spain, evaluating equilibrium conditions including the number of firms, output per firm, and price per car in each country. It also considers the impact of costless trade on market integration, leading to an expansive analysis of equilibrium under new conditions. The effects of trading with a third market are highlighted, providing insights into price changes and consumer benefits from international trade, elucidating the reasons behind falling prices and improved consumer welfare.

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Analysis of Car Industry Equilibrium and Trade Effects in France and Spain

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  1. Class 5 International Trade

  2. Exercise 1 Imagine that cars are produced by a monopolistically competitive industry in France. The demand curve facing any producer of cars is: Q=S x [(1/n)-(1/30,000) x (P-P) Q: number of cars sold per firm S: total number of cars sold for the industry N: number of firms P is the price charged by the firm P is the average price of other firms Each firm’s total cost is: C=750,000,000 + (5000 x Q) S in France is equal to 900,000 S in Spain is equal to 1.6 million • Find the equilibrium number of firms in France, the output per firm and the price per car • Find the equilibrium number of firms in Spain, the output per firm and the price per car • Now suppose that it is possible for France and Spain to trade cars costlessly with one another. This create a new, integrated market with total sales of 2.5 millions. Find the equilibrium number of firms, the output per firm and the price per car of this integrated market. • Suppose that France and Spain were to integrate their automobile market with a third country with annual market for 3,750,000. Find the number of firms, the output per firm and the price for car in the new integrated market after trade.

  3. Exercise 2 d) Why do prices fall in part c) relative to part b)? Why are consumers better off with trade?

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