Consider a Ricardian Model of Trade. There are two countries, Home and Foreign, who produce two goods Food and Clothing, using one factor of production, Labor
Consider a Ricardian Model of Trade. There are two countries, Home and Foreign, who produce two goods Food and Clothing, using one factor of production, Labor
Consider a Ricardian Model of Trade. There are two countries, Home and Foreign, who produce two goods Food and Clothing, using one factor of production, Labor
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
symmetric so that in equilibrium p = P <strong>and</strong> that rms enter till price equals<br />
average cost, i.e., prots <strong>are</strong> 0.<br />
a: Depict the prot maximizing price charged by a representative rm for<br />
given P <strong>and</strong> n. You do not need to do any algebra. Just to draw dem<strong>and</strong> <strong>and</strong><br />
the prot maximizing price.<br />
b: Show that the maximized prots <strong>of</strong> the rm <strong>are</strong> higher when its costs fall.<br />
(Hint: variable prots <strong>are</strong> also the sum <strong>of</strong> the di¤erence in marginal cost <strong>and</strong><br />
marginal revenue over units <strong>produce</strong>d)<br />
c: As n rises, what happens to the prot maximizing price? What is the<br />
intuition? Call this relation the PP curve.<br />
d: Does an increase (or decrease) in S shift the PP curve? Why?<br />
2<br />
e: As n rises, what happens to output per rm in symmetric equilibrium <strong>and</strong><br />
therefore to average cost? What is the economic intuition here? Call this curve<br />
CC:<br />
f: Does an increase in S shift CC? Why?<br />
g: Depict the equilibrium n <strong>and</strong> p without <strong>and</strong> with trade where trade is just<br />
a doubling <strong>of</strong> S?
Change language