different prices. A manufacturing good produced in region 1 costs the F.O.B. price pt for a
home consumer, while the consumers in region 2 pay the C.I.F. price ( τpi ).11
As a consequence, according to the number of variety produced in each region, the
manufacturing price index P may assume different values between regions:
1
P1 =Γ n P11~σ + n 2( p 2τ ) ' 11-σ
1 (14)
P2 = Γ n1 (P1τ )1-σ + n2 P21-σ ]1-σ
3.4 Size of the regional manufacturing industry
Production technology is the same for each variety in both locations. Manufacturing labour is
the only input. We continue to assume perfect substitubility in the production function
between low-skilled and high-skilled workers. A firm producing a specific variety at region
i, faces a wage rate w, for each unit of labour, which consequently represent the low-skilled
nominal wage. 12
Given the following profit equation:
πi= P1x1~(α + βx) wi
(15)
the profit-maximising behaviour of a firm located in region i is a constant mark-up over the
regional wage rate:
10 T ≥ 1 represents the amount of the goods dispatched per unit received at destination.
11 F.O.B. and C.I.F. are commercial clauses frequently used in international transaction meaning respectively
Free On Board and Cost Insurance and Freight.
12 In this way we are able to preserve the features of Dixit-Stiglitz framework (in particular, the number of
varieties being proportional to the regional labour force, and the scale of each firm invariant to the skilled vs.
unskilled labour ratio).
16
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