Suppose the fixed costs for a firm in the Automobile industry (start-up costs of factories, capital equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished automobile. Because more firms increase competition in the market, the market price falls as more firms enter an automobile market, or specifically, P = 17,000 + (150/n), where n represents the number of firms in the market. Assume that the initial size of the U. S. and Canadian automobile markets are 300 million and 533 million people, respectively. Required:
a. Calculate the equilibrium number of firms in the U. S. and Canadian automobile market without trade.
b. What is the equilibrium price of automobiles in the U. S. and Canada if the automobile industry is closed to foreign trade?
c. Suppose that the U. S. decides on free trade in automobiles with Canada. The trade agreement with Canada adds 533 million consumers to the automobiles market, in addition to the 300 million in the U. S. How many automobile firms will there be in the U. S. and Canada combined? What will be the new equilibrium price of automobiles?
d. Why are prices in the U. S. different in (c) and (b)? Are consumers better off with free trade? In what ways?