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 8 months ago

(30 marks) Consider a model of increasing returns to scale with symmetric firms. a) (10 marks)...

Consider a model of increasing returns to scale with symmetric firms. a) Algebraically show what the equilibrium number of firms, price, and average cost must be, in terms of their equations. You may start from the equations relating price to the number of firms p=c+1/bn, and average cost to the number of firms AC=Fn/S+c. B) with the aid of a diagram, illustrate what happens to the equilibrium number of firms, prices, and average cost when one country opens up to...

Under a monopolistic competition model with increasing returns to scale, how would equilibrium differ when the...

Under a monopolistic competition model with increasing returns to scale, how would equilibrium differ when the different varieties are closer substitutes for each other compared to when the varieties are not as close substitutes? Explain

With appropriate examples, define increasing returns to scale, decreasing returns to scale and constant returns to...

With appropriate examples, define increasing returns to scale, decreasing returns to scale and constant returns to scale. (Please write out answer versus charting it)

a) Do the following production functions exhibit constant returns to scale, increasing returns to scale, or...

a) Do the following production functions exhibit constant returns to scale, increasing returns to scale, or decreasing returns to scale? For full credit, show why. 1) Q= 10L^ 0.5K^0.3 2) Q= 10L^0.5K^0.5 3) Q= 10L^0.5K^0.7 4) Q= min{K, L} b) Which objects pin down a_LC and a_KC? Explain carefully. c) Why does labor being mobile across sectors automatically imply revenue maximization for firms? Explain carefully.

2. (8 marks) In a model of dynamic increasing returns, illustrate an alternate scenario to what...

2. In a model of dynamic increasing returns, illustrate an alternate scenario to what we discussed in class and briefly explain using words. In this scenario, France protects its cotton industry with a temporary blockade, but after the blockade ends the protection is not enough for France to retain an advantage in cotton production, and once UK cotton is no longer blockaded, that the UK will recover its initial advantage. Be sure to draw and label any necessary learning curves...

a) Why do increasing returns to scale occur? b)why do decreasing returns to scale occur?

Explain specialization and increasing returns to scale in the short run.

Consider an industry that produces differentiated products with increasing returns to scale.

Consider an industry that produces differentiated products with increasing returns to scale. The market structure is monopolistic competition. The firms in the industry have different productivities and different marginal cost. How would trade liberalization affect demand curve facing a firm? Would the change have the same effects on firms with different marginal cost? Why? Explain why international trade could improve the efficiency of the industry. In many countries, the exporting firms are more productive than firms which serve only...

5. (i) Do the following functions exhibit increasing, constant, or decreasing returns to scale? (ii) Do...

5. (i) Do the following functions exhibit increasing, constant, or decreasing returns to scale? (ii) Do the following functions exhibit diminishing returns to labor? Capital? Show how you know. a. q = 2L^1.25 + 2K^1.25 b. q = (L + K)^0.7 c. q = 3LK^2 d. q = L^1/2 K^1/2

A: Explain what Returns to Scale measures and distinguish between increasing, decreasing and constant Returns to...

A: Explain what Returns to Scale measures and distinguish between increasing, decreasing and constant Returns to Scale B: Explain the relationship between Returns to Scale and Long Run Average Cost C: Explain the relationship between Marginal Product of Labor and Marginal Cost. D: Explain why a firm's marginal Cost curve represents its Supply Curve.

Question