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?