4. Assume that the market for computers is dictated by monopolistic competition

ID: 1098426 • Letter: 4

Question

4. 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?

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 =. n*11 =12890.91

=> n=1171.81 firms

so number of firms =1172 ( 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 it is .0.0005. So consumers are better off

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