Answer Happy

2. Krugman Model (8 points) Consider the facemask industry which is a monopolistically competitive industry in Home country. First, we assume all firms have the same cost function for producing masks: C = F +cQ, with fixed cost F = $15,000 and the marginal cost c = $20 per package of masks. Moreover, for a monopolistically competitive firm, we assume the demand in Home is given by 1 Q = SE - b(P – P)] where Q is an individual firm's sale, S is the total sales of the industry, n is the number of firms in the industry, P is the price charged by the firm itself, and is the average price charged by its competitors. b represents the intensity of competition and is assumed to be 0.6. (a) List two conditions to solve the optimal price of the monopolistically competitive firm. Without trade, the total sales of facemasks in home are 324,000 packages, calculate the equilibrium number of firms and equilibrium price and quantity in Home country. (3 points) (b) Consider a world with four symmetric countries. In other words, the facemask industry in other three countries is exactly the same as Home country, although they produce different variety of facemasks. Now assume countries have free trade among them. What is total number of firms in the facemask industry in the world? How trade affects the price and output of each firm? (2 points) (c) Following (b), the outbreak of Covid-19 dramatically increased the world demand of facemasks, so the world market size of facemasks increased by 25 times. Compared with the price in part (b), does the rising demand of facemasks increase the price of facemasks and why? (3 points)