ECN 340 Solution_to_Ch6_Q1

ECN 340 Solution_to_Ch6_Q1 - times larger than in a sin-gle...

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Increasing Returns to Scale and Imperfect Competition 1. Explain how increasing returns to scale in production can be a basis for trade. Answer: With increasing returns to scale, countries beneFt from trade due to the po- tential to reduce their average costs by expanding their outputs through selling in a larger market. 2. Why is trade within a country greater than trade between countries? Answer: Border effects prevent trade between countries from being as large as within countries. These factors include tariffs, quotas, administrative rules and regulations, and whether the countries have a common border or language. 3. Starting from the long-run equilibrium without trade in the monopolistic competi- tion model, as illustrated in ±igure 6-5, 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
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Unformatted text preview: times larger than in a sin-gle country, and the number of Frms in the world is three times larger than in a sin-gle country. a. Compared with the no-trade equilibrium, how much does industry demand D increase? How much does the number of Frms (or product varieties) increase? Therefore, does the demand curve D / N A still apply after the opening of trade? Explain why or why not. Answer: Industry demand increases by three times, and the number of Frms also increases by three times. Compared with the no-trade equilibrium, the demand curve D / N A does not change because both total quantity demanded and the number of Frms tripled. b. Does the d 1 curve shift or pivot due to the opening of trade? Explain why or why not. Answer: Because D / N A is unchanged, point A is still on the short-run demand curve facing each Frm ( d 2 in igure 6-6). However, the demand curve faced by S-49 6...
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