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Suppose that the fixed startup costs (to build the factory and buy equipment) for a firm producing MP3 players, a differentiated good, is $250,000.
Suppose that the fixed startup costs (to build the factory and buy equipment) for a firm
producing MP3 players, a differentiated good, is $250,000. Variable costs (labor and materials) are $10
per MP3 player produced. The market price in dollars is given by P = 10 + (1/n),where n equals the number of firms serving the market.
Assume that each firm serves an equal fraction of the market.
i) Suppose that the country Gamma has a population of 10,000 people. Find the number of firms
producing MP3 players under autarky and the equilibrium price.
(ii) Suppose that Gamma forms a free trade area with Delta and that Delta has a population of
750,000. Find the number of firms serving the combined market and the new equilibrium price.
