N1

Suppose industry X is characterized by monopoly under autarky, while industry Y is perfectly competitive

(i) Using the monopolist's first-order condition in industry X, explain why under autarky, relative prices and output differ from the case of perfect competition in both industries.

(ii) If this economy is open to trade, explain why the perceived demand curve facing the monopolist becomes more price elastic.

(iii) Illustrate the additional gains from trade when an industry is a monopoly under autarky.

Suppose the above market structure under autarky is replicated in a home and foreign country, and the two economies are identical in every other respect. Also, assume that once the economies are open, the firms in industry X behave in Cournot-Nash fashion.

(iv) How does the first-order condition for each firm in industry X, compare to that for a monopolist?

(v) Are there any gains from trade in this market, and what might the structure of trade look like?