370_Homework-5

370_Homework-5 - Econ 370 Fall 2011 International Trade...

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Econ 370 Fall 2011 International Trade Professor Soderbery Homework 5 Due November 27 th Monopolistic Competition in Differentiated Goods and International Trade 1. Starting from the long-run equilibrium without trade in the monopolistic competition model, as illustrated below, consider what happens when the Home country begins trading with two other identical countries. Because the countries are all the same, the number of consumers in the world is three times larger than in a single country, and the number of firms in the world is three times larger than in a single country. a. Compared with the no-trade equilibrium, how much does industry demand D increase? How much does the number of firms (or product varieties) increase? Therefore, does the demand curve D / NA still apply after the opening of trade? Explain why or why not. b. Does the ! ! curve shift or pivot due to the opening of trade? Explain why or why not. c. Compare your answer to (b) with the case in which Home trades with only one other identical country. Specifically, compare the elasticity of the demand curve
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370_Homework-5 - Econ 370 Fall 2011 International Trade...

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