Problem: We are working with a firm in a software industry with low startup costs and a relatively small maximum market size (something like a business-to-business web product). The fixed costs are $500,000 and maximum market size is 10,000 clients. The demand elasticity parameter is 1/1250 and marginal costs are $15,000.
a. Find the AC curve for this industry.
b. Find the Price curve for this industry.
c. Graph these curves on the same axis. Label all incepts and slopes.
d. Find the maximum number of firms this industry can support.
e. What is the price these firms will charge?
f. How can we use this approach to determine whether to make an acquisition in this industry?
g. Now imagine we open trade with a country with a market size of 9,600. Find the new maximum number of firms and price?
h. How does opening to trade benefit consumers?
i. Which firms are likely to benefit from this shift to trade? Who might be worse off? Why?