ABSTRACT
Assuming that the products are transported at no cost between countries, the prices of each product in two countries are equal. Therefore, the demand functions for Foreign consumers are
d˜ ig = pig 1_____θ – 1 w˜L˜_________M(P)θ/(θ – 1) where g = k, k˜. (18.4)
Differentiated products are supplied by monopolistically competitive firms. There is cross-country technical heterogeneity: each Home (Foreign) firm in industry i has both α i (α˜ i) units of labor as a fixed input and β i (β˜ i ) units of labor as a variable input. With the number of firms being very large, the elasticity of demand for each product becomes σ. Thus, each product is priced at a mark-up over marginal cost:
pik = σβw______(σ – 1), p
σβw˜______(σ – 1).
