Assume that the market for computers is dictated by monopolistic competition wit

Question

Assume that the market for computers is dictated by monopolistic competition with symmetric firms. The total market demand is comprised of 5,000 computers, while the costs of building an assembly line for construction of computers rings in at $100,000. Parts and labor for each computer runs companies $800. The measure of substitutability, b, is given as 0.0005.

a. Given all of this, what is the equilibrium number of firms and the price they charge in the market?

b. What happens if the market is integrated with another country of identical size (same demand). If necessary, round the number of firms to the nearest whole number.

c. Are consumers in the original country better off, worse off, or indifferent from the change and why? What about producers?

Explanation / Answer

a) for equilibrium price,

price = minimum of ATC

here Total cost (TC) = 100000+800*Q^2

so Average total cost (ATC) = TC/Q =100000/Q+ 800 Q

=> for minimum dATC/dQ =0

=> 100000*(-1/Q^2)+800 =0

=> Q = 11.18

=> equilibrium quantity = 11(appx)

price = ATC = 100000/11+ 800*11= 17,890.91

so price charged =$17,890.91

demand function Q= p-5000 = 17890.91-5000 =12,890.91

equilibrium number of firms n* 11= 12890.91

=>n = 1172 firms

hence equilibrium number of firm =1172

b) if the market is integrated with another country of identical size ,

then number of firms = 1171.81*2 =2343.62

=> n=2344 firms

so number of firms =2344( rounded to intiger)

c)As substitutability =0.0005

and Q =P-5000

=> dQ/dP =1

and dQ/dP*P/Q =1*11/17890.91

=0.000625

As given b= 0.0005. which is less than 0.000625 .So consumers are better off

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