Japan and Germany have very well - developed automobile industries but have productivity differences across firms. The market structure for the automobile industry is monopolistically competitive because it is characterized by increasing returns to scale technology. The productivity difference takes the form of c = 1/phi where a more productive firm has a higher phi, therefore a lower marginal cost, c. Can you derive the price charged and the average cost of such a firm, in autarky? Now, let the PP and the AA curves be true for average price and average AC in the industry. After trade opens, if the average price falls, can you compare and show what is happening to a firm with the highest phi and the one with the lowest phi? Give answer with graph.

Japan and Germany have very well - developed automobile industries but have productivity differences across firms. The market structure for the automobile industry is monopolistically competitive because it is characterized by increasing returns to scale technology. The productivity difference takes the form of c = 1/phi where a more productive firm has a higher phi, therefore a lower marginal cost, c. Can you derive the price charged and the average cost of such a firm, in autarky? Now, let the PP and the AA curves be true for average price and average AC in the industry. After trade opens, if the average price falls, can you compare and show what is happening to a firm with the highest phi and the one with the lowest phi? Give answer with graph.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.3P

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