International Trade and Monopolistic Competition Exam Review

Monopolistic Competition and Trade

Market Dynamics and Firm Exit

2) In the model of monopolistic competition, if firms have different average cost curves, then opening trade will cause less efficient firms to exit the industry.

Industry Output and Demand

5) In the model of monopolistic competition, an increase in industry output will cause individual firms' demand curves to become flatter, which will reduce demand for higher-priced goods and increase demand for lower-priced goods.

7) In the model of monopolistic competition, an increase in industry output will reduce market shares and reduce profits of producers of higher-priced goods and will increase market shares and increase profits of producers of lower-priced goods.

Trade Costs

3) In the model of monopolistic competition, trade costs between countries cause:

• Some firms that can earn a profit on domestic sales to refrain from exporting their goods.

Chapter 9: Tariffs and Trade Policy

Large Country Tariff Effects

16) The tariff levied in a "large country" (Home) lowers the world price of the imported good. This causes:

• Foreign suppliers to produce less of the good on which the tariff was levied.

1) If a good is imported into a (large) country H from country F, then the imposition of a tariff in country H:

• Raises the price of the good in H and lowers it in F.

Small Country Tariff Effects

2) If a good is imported into a (small) country H from country F, then the imposition of a tariff in country H:

• Raises the price in country H and does not affect its price in country F.

Welfare Analysis

12) The change in the economic welfare of a country associated with an increase in a tariff equals:

• Efficiency loss - terms of trade gain.

Export Policies

1) An export tariff will increase producer surplus, decrease consumer surplus, increase government revenue, and have an ambiguous effect on overall domestic national welfare.

2) An export subsidy will increase producer surplus, decrease consumer surplus, decrease government revenue, and decrease overall domestic national welfare.