d Trad Starting from the longrun eqilibrium without trade in

d Trad Starting from the long-run eqilibrium without trade in the monopolistic competition model, as illustrated in figure 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 Price Firm demand when all firms charge the same price Short-run equilibrium without trade Long-run equilibrium without trade PA AC MC d, : mr Quantity (a mpared with the no-trade equilibrium, how much does industry demand D increase? How much does the number of firms (or product varieties) increase? Does the demand curve D /NA still apply after the opening of trade? Explain why or why not. (b) Does the ds curve shift or pivot due to the opening of trade? Explain why or why not. (c) Cmpare 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 di in the two cases (d) In terms of the final long-run equilibrium price and quantity with trade, what is the difference between trading with two identical countries vs. one identical country?

Solution

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