Consider two countries in the monopolistic competition model: Home

and Foreign. All firms have the same fixed cost and marginal cost. In the short-run

equilibrium without trade, the number of firms selling products in Home is N1 and

that in Foreign is N2. However, the product price in the short-run without trade in

Home is higher than the average cost of Home firms, but that in Foreign is lower

than to the average cost of Foreign firms. Let N3 be the number of Home firms

in the long-run equilibrium without trade, and N4 be the number of Foreign firms

in the long-run equilibrium with trade. Rank N1, N2, N3 and N4. Explain your

reasoning.

2. (10 points) Rank the welfare of the entire country with the following protection

policies under perfect competition and explain your reasoning.

(a) Tariff t1 per unit of imports to a large country, and the equilibrium imported

quantity is M1 > 0. Assume that the tariff t1 is higher than the optimal tariff.

(b) Tariff t2 per unit of imports to a large country, and the equilibrium imported

quantity is M2 > M1 and M2 > 0.

(c) Tariff t3 per unit of imports to a large country, and the equilibrium imported

quantity is 0.

3. (10 points) Rank the welfare of the entire country with the following policies and

explain your reasoning.

(a) Export subsidy of US$5 per pound of sugar in a small country

(b) Export subsidy of US$5 per pound of sugar in a large country

(c) Production subsidy of US$5 per pound of sugar in a small country

4. (10 points) Suppose the world price of an Airbus-320 airplane is US$80 million,

and the price of a comparable airplane made in Brazil is US$100 million. Suppose

Brazil's government imposes tariffs of US$20 million on an Airbus-320 airplane. Let

us assume that 20 years later the world price of an Airbus-320 airplane becomes

US$70 million, whereas the price of a comparable airplane made in Brazil becomes

US$60 million. Does an infant industry argument justifies Brazil's tariffs on Airbus-

320 airplanes? Explain your reasoning.