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International Trade and Finance

by: April Jerde

International Trade and Finance ECON 464

Marketplace > University of Wisconsin - Madison > Economcs > ECON 464 > International Trade and Finance
April Jerde
GPA 3.6

Maria Muniagurria

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Maria Muniagurria
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This 2 page Class Notes was uploaded by April Jerde on Thursday September 17, 2015. The Class Notes belongs to ECON 464 at University of Wisconsin - Madison taught by Maria Muniagurria in Fall. Since its upload, it has received 62 views. For similar materials see /class/205133/econ-464-university-of-wisconsin-madison in Economcs at University of Wisconsin - Madison.


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Date Created: 09/17/15
Econ 464 M Muniagurria Notes on Monopolistic Competition 1 Representative Consumer Utility Function uq1q2 E 1 wher60lttxlt1 N Income in labor units I L 2 n q i 1 Where n q are the pro ts of a rm producing brand i and N is the number of brands produced 11 Firms All potential rms have an identical Increasing Returns to Scale technology Total Cost in labor units TCI qI F c q1 if q1gt 0 0 if q 0 Where F and c are positive constants III Autarky Equilibrium under Monopolistic Competition Is a set of prices number of brands produced and quantity produced of each brand N pl ql I 1 N such that 1 Consumers Maximize utility and Firms maximize pro ts 2 There is free entry of rms ie pro ts are zero 3 The labor market clears ie supply of labor L equals demand for labor N L 2Fcq 1 IV Market for goods clears Characterization and Computation of Equilibrium in Autarky A Utility maximization subject to the budget constraint implies that the elasticity of demand is n elasticity of demand 1 0c 1 B Each rm will produce a di erent brand so there is a single producer of variety I Pro t Maximization requires that Marginal Revenue MR equals Marginal cost Since MR pI 1 1n we have that pI 1 111 c and therefore p c 11n cx Free entry requires that n q pI qI F c q1 0 then q F P C Using and then q Ix1 FC C We calculate the number of brands that will be produced using the labor market equilibrium condition and the fact that every rm will produce the same amount given by N i the equilibrium number of brands is N 1xLF D Market clearing Suppose there is a single consumer so for commodity i the quantity he consumes is equal to the quantity produced by the only rm producing commodity i of qf q a lt1 1 F c gt L 2Fcq NFcq NFc oclxFc NF1x then 1 Example of Equilibrium in Autarky and Free Trade Let x 12 Autarky for a single country in this case n 2 p 2 c q Fc N L 2 F Free trade with 2 identical countries the prices and quantities of each brand are the same but now there are twice as many brands So the number of varieties is W L F Each consumer buys all the varieties and consumes an equal amount of each variety so it will consume half of the amount it used to consume of the available varieties Suppose there is single consumer in each country then in autarky he consumes qJC q Fc and in free trade he will consume qCFTquot q 2 F 2c Notice that this is the case since the rm that produces variety I has a single customer in autarky and two customers in free trade The consumer has higher utility in free trade since u free trade W qJCW 39 2 N q 2 V 212 N qj V gt u autarky N qj V


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