Suppose that fixed cost for a firm in the automobile industry is $5 billion (i.e., F = 5 billion) and that variable cost costs are equal to $17,000 per finished product (i.e., c = 17, 000). Assume that the price of each car is given by P = 17, 000 + 150/n, where n is the number of firms in a market. Suppose that the initial size of the U.S. and the European automobile markets are 300 million and 533 million people, respectively.
a. Calculate the equilibrium number of firms in the U.S. and European markets without trade.
b. What is the equilibrium price of automobiles in the U.S. and Europe if there is no trade between them.
c. Now suppose that there is a free trade between the U.S. and Europe. Calculate the equilibrium number of firms in the U.S. and European combined. What will be the new equilibrium price of automobiles?
d. Are consumers in each country better off? Why?