Question

9. You are a consumer of a product that your country imports. There is an increase in the demand for this type of product in the rest of the world.
a. If the product is undifferentiated and its market is perfectly competitive, will this development have a positive or negative impact on your welfare? Briefly explain.
b. If the product is differentiated and its market is monopolistically competitive, will this development have a positive or negative impact on your welfare? Briefly explain.
10. True/False. For each part, explain your answer regardless of whether it is true or false.
a. If substantial internal scale economies exist, production of a commodity tends to be concentrated in a few large facilities in a few countries.
b. Less skilled workers in developed countries tend to benefit from (and will therefore tend to support) free trade agreements with relatively unskilled-labor abundant developing countries.

Answer 1

9. a) In the given case, it is said that we consume a product that is being imported by the country and the product is undifferentiated and the market is perfectly competitive with the demand for the product being high in the rest of the world. An undifferentiated product would mean that there is a high threat for substitution for the product. For example, it may refer to the daily usage products like milk, gasoline etc where even a slight change in the price would influence the consumer to choose the substitutes as there is a higher need for the products in the market. A perfectly competitive market in economic terms would mean that all the players in the market sells the same type of products and all the firms are price takers and hence has a lesser influence on the market structure and the pricing mechanism when compared to the normal competitive market. In this context, it can be seen that there would be lesser influence on the market and the consumer allocations in the market as all the firms would be selling the same products. But in the context that the demand is more in other parts of the world, this would mean that the imports would become costlier and in this scenario, the cost of sales inside the country would also go up. In the wake of a perfectly competitive market, the firms would be less likely to influence the market structure and hence they would have only a lesser influence on the pricing mechanism in the economy. Thus, when the consumer welfare is being considered, all the above factors are likely to have a slightly negative influence on the consumer as the firms in the market would not have a substitute product to offer for the consumer and due to higher demand in the other parts of the world, the pricing would also be higher.

b) In this case, it is said that the products are differentiated and the market is monopolistically competitive. A differentiated product would mean that the products are made attractive to differentiate it from others and the monopolistically competitive market would mean that many firms in the market would offer products which are similar but not likely to be perfect substitutes of each other. As the products are differentiated and there is an increased demand for the products in the international market, the imports are likely to be costlier as in the above scenario. As the products for sale in the market cannot be perfect substitutes, still the pricing mechanism would be more attractive as the products are differentiated and the available substitutes are likely to attract the consumers as such products are not falling in to the category of urgent and daily usage and hence it is likely to have a slightly positive impact on the consumers in the domestic market but however the advantage would be lost if the consumers would prefer not to be satisfied with the available substitutes for the required product in the market.