4. Consider country A with a sector characterised by increasing returns to scale, where homogeneous firms produce a differentiated good and operate under monopolistic competition. If the elasticity of substitution (1/ (1 – a)) is constant and higher than one (i.e., a E (0, 1)), bilateral trade liberalisation with country B, characterised by the same preferences and technology, but one third the size of A (LA = 3LB): (a) makes varieties triple in B and welfare inerease by less than 50 percent in A (b) makes varieties triple in A and welfare increase by less than 50 percent in B (c) makes varieties double and welfare less than double in both countries (d) none of the above

4. Consider country A with a sector characterised by increasing returns to scale, where homogeneous firms produce a differentiated good and operate under monopolistic competition. If the elasticity of substitution (1/ (1 – a)) is constant and higher than one (i.e., a E (0, 1)), bilateral trade liberalisation with country B, characterised by the same preferences and technology, but one third the size of A (LA = 3LB): (a) makes varieties triple in B and welfare inerease by less than 50 percent in A (b) makes varieties triple in A and welfare increase by less than 50 percent in B (c) makes varieties double and welfare less than double in both countries (d) none of the above

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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