It is Krugman Model (1979). Increasing Returns and Monopolistic Competition

. Preferences. CES preferences over a continuum of varieties w E (0, n) U = ( 9 (w) + p) odw (Utility) with $ > 0. . Technology. 1 ( 9 ) = 1+4 (technology) 4 - 1(q): labor needed to produce q units of differentiated good - technology homogeneous across varieties - Increasing returns to scale modeled as fixed cost f . Market structure: monopolistic competition (a) Derive the elasticity of demand 1 = Idq(w) p(w) dp ( w) q(w)' and show that it is decreasing in the quantity produced. Derive the equilibrium price and the number of firms