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Suppose the Olive Oil 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 oil. Otherwise, the olive oil producers are in all ways identical. They each face a linear demand curve of the type described in Lesson 8:
Pi=1nb+P¯-XiX¯bPi=1nb+P¯-XiX¯b for any firm i. Fixed Costs are F=$6M, Marginal costs are constant C=$300 per barrel. b=.0125. The size of the home market is 30M barrels, and foreign is 15M 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?
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