The growth in productivity translates to an increase in real earnings of 3% over the 8-year period. Despite the short-run adjustment cost of job loss, new jobs were created elsewhere in manufacturing over the long run. What evidence is there that Canada is better off under the free-trade agreement with the United States? Answer: Economist Daniel Trefler found that between 19 the pro- ductivity of Canadian firms increased by as much as 18% in industries most affected by the tariff cuts.
In particular, this number is larger than the predicted amount of trade between the United States and Italy, as calculated in part (a). Even though Italy’s GDP is much smaller than that of the United States, the short distance between France and Italy dominates the size effect here. # S-54 Solutions n Chapter 6 Increasing Returns to Scale and Monopolistic Competitionĭ E the short distance between the two countries. Each firm produces Q 4 at a price of P 4 attempting to earn monopoly profits at point D, and when all firms do so they move along the new D /N T curve to point E. Answer: The increase in demand shifts the D /N T curve to the right, dragging along the curves d 3 and mr 3. Redraw Figure 6-7 for the Home market and show the shift in the D /N T curve and the new short-run equilibrium. For instance, suppose that this is the market for cars and lower gasoline prices generate higher demand D. Starting from the long-run trade equilibrium in the monopolistic competition model, as illustrated in Figure 6-7, consider what happens when industry demand D increases. Therefore, firms will produce a greater quantity, at lower average cost, than the in the two-country case. Because the demand curve facing each firm with trade (d 3 ) is flatter when there are three countries compared with two, it will end up further down the average cost curve in Figure 6-7. Answer: The long-run equilibrium with trade occurs where the demand curve facing the firm is tangent to the average cost curve, to the right of the long-run equilibrium without trade (due to the exit of firms from the industry). Illustrate the long-run equilibrium with trade and compare it with the long-run equilibrium when Home trades with only one other identical country. For that reason, the demand curve facing each firm d 1 is flatter (more elastic) when there are more trading partners. Answer: In the case with three countries, Home consumers have more variet- ies to choose from compared with the two-country case. Specifically, compare the elasticity of the demand curve d 1 in the two cases. Compare your answer to (b) with the case in which Home trades with only one other identical country. However, the demand curve faced by S- 6 each firm becomes more elastic due to the increase in the number of firms: d 1 pivots to become flatter, like d 2 in Figure 6-6. Answer: Because D /N A is unchanged, point A is still on the short-run demand curve facing each firm (d 2 in Figure 6-6). Does the d 1 curve shift or pivot due to the opening of trade? Explain why or why not. Compared with the no-trade equilibrium, the de- mand curve D /N A does not change because both total quantity demanded and the number of firms tripled. Answer: Industry demand increases by three times, and the number of firms also increases by three times. Compared 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 /N A still apply after the opening of trade? Explain why or why not. 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. Starting from the long-run equilibrium without trade in the monopolistic compe- tition model, as illustrated in Figure 6-5, consider what happens when the Home country begins trading with two other identical countries. These factors include tariffs, quotas, administrative rules and regula- tions, and whether the countries have a common border, culture, or language. 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. Answer: With increasing returns to scale, countries benefit from trade because of the potential to reduce their average costs by expanding their outputs through selling in a larger market.
Explain how increasing returns to scale in production can be a basis for trade. Increasing Returns to Scale and Monopolistic Competition 1.
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