How does international trade increase welfare for consumers
according to a monopolistic competition model with increasing...
How does international trade increase welfare for consumers
according to a monopolistic competition model with increasing
returns to scale? And what trade pattern can this model
successfully explain?
Increasing Returns and Monopolistic Competition
A. Model of Monopolistic Competiton
- ATC and MC
curves
- Entry, exit
and long-run equilibrium
B. Effect of trade in the short-run
C. Effect of trade in the long-run
- Effect on
total number of firms
- Effect on
ATC
With monopolistic competition, opening to trade leads to ----
prices, ---- product variety for consumers, and ---- firms
domestically.
A higher; more; more
B lower; more; fewer
C lower; less; fewer
D lower; more; more
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
1. Describe the sources of gains from trade for the consumer in
the monopolistic competition model with differentiated products.
Hint: there are two mechanisms at work. (3 points each).
2. Describe the gravity equation (for international trade, not
physics) in detail and provide the formula (4 points).
1. Explain the effect that Monopolistic Competition has on
international trade. Also, refer to your limitations.
2. Refer to the effects or consequences on the general balance
of the tariff: small country case