Suppose that the aircraft industry exhibits increasing returns to scale and the market structure is that of monopolistic competition. There are two countries, A and B, that have the same cost structure. The fixed cost of producing planes is £2 billion, whereas the marginal cost is £10000 per plane. The relationship between the price of a plane and the number of firms, n, is P = 10000 + (10/n). The initial size of the market in country A is 5 billion aircrafts and in country B it is 28.8 billion aircrafts. (a) What is the equilibrium number of firms in each country, if they don’t engage in trade? What is the equilibrium price? (b) Suppose that the two countries engage in trade. What is the equilibrium number of firms and the equilibrium price? How many firms will be in country A and how many in country B? (c) Draw a graph showing the change in the number of firms and the equilibrium price, because of trade . (d) Are consumers better or worse off from the two countries engaging in trade and why
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