An increase in the regional size works through changes in the variety of goods (firms)
available, leaving inalterated both mark-up over marginal cost and the scale of individual
production. The equilibrium number of firms is therefore proportional to the region’s
effective population of workers:
n1 = Ll
n 2 L2
(21)
3.5 Equilibrium conditions in goods and labour markets
In equilibrium the optimal output for any firm should be equal to the demand for its product
in both regions:
* ..
X1 = μ
-σ
Y2
* ..
X 2 = μ
f (P2T)-σ Y
[ P-σ-i) 1
-σ
[ P2-(σ-i)
Y2
(22)
After some manipulation, using the pricing rule equation, we obtain the following
expression for the nominal wages at which each firm breaks even:
(23)
' σ -1 '
< ασ /
18
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