5. (14 marks) In the increasing returns to scale model, where firms can differ in terms...

5. In the increasing returns to scale model, where firms can differ in terms of their marginal cost of production,

a) Explain how you would expect opening up to trade to affect the cutoff marginal cost. Explain also which firms win and which firms lose, specifically making reference to a diagram with the demand curve (and any changes to it) to help you explain your points.

b) Suppose that the rise of Chinese import competition leads to an increase in competition, but no corresponding increase in market size for firms. How would this affect the cutoff marginal cost, as well as the operating profits of different firms (with different marginal costs)? Is this consistent with Bloom, Draca, and Van Reenen (2016)’s findings that we discussed in Lecture 18?

Expert Solution

Rahul Sunny answered 7 months ago

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