Question

The world economy consists of one, giant country, occupying an entire continent, Pangaea. Pangaea is a developed, modern economy, where consumers enjoy many varieties of every good. Each sector of this economy is well captured by the monopolistic competition model studied in class. As a result of a civil conflict, the country splits into two new countries, North Pangaea and South Pangaea, of roughly equal size (in terms of people, land, and resources). The two new countries do not trade with each other. (a) Use the main diagram of the monopolistic competition model under symmetry (hint: PP and CC) to show what happens to the number of varieties and the price charged, by comparing before and after the break-up. (Label axes, curves and key coordinates!) (b) Briefly explain how consumers are impacted by this change. (Hint: what do consumers care about/like?)

Answer 1

Monopolist competition model is a type of imperfect competition where many producers sell products that are differentiated from one another .Models of monopolist competition are often used to model industries

PP curve is like a demand curve where

P=C+1 (b+n), as more variable available n rise and P falls. Slopes down

CC curve is like a supply curve.

AC= n*(F+S)+C

Slopes up because increasing n raise average cost with more varieties. Each producer has a smaller market share and can't spread fixed cost over large output.

The range of varieties of goods available for consumer increases and did results in higher consumer utility since their taste are characterised by love for variety.

The price for each variety decreases since

P=AC

This implies that each country increses the level of production and thus produces at lower unit cost. Each country better exploit economics of scale. Production efficiency increases.