B. A striking empirical regularity that is hard to see as consistent with standard, classical or neoclassical trade theory is the large share of international trade that is intra-industry in nature. 1. A significant part of the work for which Paul Krugman won the Nobel prize in economics was a framework that accounted for this trade. What is the formal basis for the Krugman model? [15 points] 2. Demonstrate that, in the Krugman model, trade between identical countries is welfare increasing. Drawing on material from the text and/or lecture, is there evidence that this kind of trade adds significantly to the gains from trade? [10 points] 3. Another empirical finding of considerable significance is the degree of firm heterogeneity within sectors that are, overall, both import-competing and exporting. Without developing the Melitz model in detail, explain the additional gains from trade in that model. [10 points]