Reference no: EM133597199

Case Study: Suppose that ?xed costs for a ?rm in the air-conditioning manufacturing industry (start-up costs of factories, automation chain, etc.) are $4.9 billion, and that variable costs are $15,000 per ?nished air- eon. Suppose that the air-con market is monopolistically competitive, and ?rms are identical. More ?rms increase competition, and so the market price falls as more ?rms enter the market, making the market price to be P = 15,000 + 400ftt, where n represents the number of ?rms in the market. Assume that there are three countries in the world: Brisbane, Sydney, and Melbourne, with the market size being 200 million, 550 million, and 400 million, respectively.

Questions:

a. Calculate the equilibrium number of ?rms and the price of each air-con in Brisbane in autarky.

b. Now suppose that the three countries join to form a free trade area, and assume no transportation costs. How many ?rms will there be in the combined market? What will be the new equilibrium price, and average cost for each air-con?

c. Suppose instead that a lockdown now closed Melbourne off from the rest of the world, so that the free trade area now only consists of Brisbane and Sydney. At the same time, summer is approaching, resulting in the price equation changing to P = 15,000 + 450,111. Calculate the number of ?rms, the equilibrium price, and average cost for each air-con in this combined market. I].

d.Compare the number of ?rms, and the price that Brisbane consumers pay for each air-con between the scenarios in (a), (b) and {c}. In which scenario would Brisbane consumers bene?t the most, and explain why.