Business Finance Homework Help

Consider a good that is produced by an industry characterized by monopolistic competition. At the
beginning there are two separate markets with annual sales 1.08 billion and 1.92 billion units, respectively.
The sensitivity parameter of individual firm’s demand to price changes is 1/150; fixed costs are 500
million; and marginal cost is constant at $12,000 per unit. Using this information and your knowledge
of monopolistic markets, answer the following questions.

1. (a)  In absence of international trade, how many firms are operating in each market?

2. (b)  What are the respective prices for consumers in each market?

3. (c)  How many firms will operate in the integrated market under international trade regime with no
   trade costs?

4. (d)  What will be the price in the integrated market?

5. (e)  Is lower price the only benefit of the integrated market to the consumers? Explain.

6. (f)  As stated above, the problem assumes that all firms have the same technology. In reality, this is
   not true. Explain how one can easily modify the problem in order to consider the scenario when
   when firms have different production technologies.