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Pages: 6 (2083 words) Published: May 31, 2013
Effect of Imperfect Competition on International Trade

International trade can create a larger market. We can illustrate the effects of trade on prices, scale, and the variety of goods available with a specific numerical example. Imagine that automobiles are produced by a monopolistically competitive industry. The demand curve facing any given producer of automobiles is described by Q = S X [V n - b X (P - P) l with b = 1/30,000. Thus the demand facing any one producer is given by Q = S X [1/n - (1/30,000) X (P - P)], where Q is the number of automobiles sold per firm, S the total sales of the industry, n the number of firms, P the price that a firm charges, and P the average price of other firms. We also assume that the cost function for producing automobiles is described by C = F + cXQ, with a fixed cost F = \$750,000,000 and a marginal cost c = \$5000 per automobile. The total cost is

C = 750,000,000 + (5000 X Q).
The average cost curve is therefore
AC = (750,000,000/0 + 5000.
Now suppose there are two countries, Home and Foreign. Home has annual sales of 900,000 automobiles; Foreign has annual sales of 1.6 million. The two countries are assumed, for the moment, to have the same costs of production. In the absence of trade, Home would have six automobile firms, selling at a price of \$10,000 each. To confirm that...