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Suppose the Whisky industry (good X) is characterized by Monopolistic Competition in both the Home and Foreign country. The different producers offer differentiated products based on the flavor of their whisky. Otherwise, the whisky producers are in all ways identical. They each face a linear demand curve of the type described in Lesson 8: Pi=1nb+P¯-XiX¯b for any firm i. Fixed Costs are F=$10M, Marginal costs are constant C=$950 per barrel. b=.00048. The size of the home market is 12M barrels, and foreign is 30M barrels. [Note: any fractions for the equilibrium number of firms (n) should be rounded down to the nearest integer when doing any further calculations.]
a. How many firms will produce in the home market in autarky? How much output for each firm? What is the price per barrel?
b. How many firms will produce in the foreign market in autarky? How much output for each firm? What is the price per barrel?
c. How many firms will produce in equilibrium when the countries open for trade? How much output for each firm? What is the price per barrel?
d. Briefly explain, in words (no math), the sources of the gains from trade in this monopolistic competition model. Additionally, can you identify who are the "losers" as a result of this trade and why they are worse off.
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