Firms in the Global Economy
Suppose that firms in the US auto industry are symmetric and compete based on monopolistic competition. The US economy demands in total 50 million cars and each auto manufacturing firm faces the following demand function
\begin{equation*}
q = \frac{50,000,000}{s} \left[ 1 - \frac{1}{n} - \frac{1}{24,000} (p - \bar{p}) \right],
\end{equation*}
where $n$ is the total number of firms competing in the industry and $\bar{p}$ is the average price charged by these firms. Each firm also operates based the following total cost function
Answer the following questions:
$TC = 750,000,000 + 25,000q$.
i. Calculate the number of firms, $n$, and the price, $\bar{p}$, charged by each firm.
(answer: $n = 40$, $\bar{p} = 25,600$)
ii. What happens to the number of firms and prices if population in US grows by 300% (i.e., $S$ increases from 50 million to 200 million cars)?
(answer: $n = 80$, $\bar{p} = 25,300$)
iii. What happens to the number of firms and prices if the US opens up to trade and the rest of world is 8-times larger (i.e., the rest of world demands a total 400 million cars)?
(answer: $n = 120$, $\bar{p} = 25,200$)
