Рг =
Y.
βw*
(16)
Relative prices must then be:
(17)
Free entry drives profit to zero, and the optimal output level is the same for each firm in any
region:
*
x*
α (σ -1)
β
(18)
the associated equilibrium labour input is also constant and given by:
l* = α + βxi = α + α (σ -1) = ασ
(19)
Full employment of the labour force allow us to determine the number of manufacturing
varieties in equilibrium13:
ni = Li
i у*
li
Li
ασ
(20)
13 Since each variety is produced in one location by a single firm, ni represents both the number of varieties and
the number of firms in region i.
17
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