The following questions are about monopolistic competition. A. Consider Krugman's model of monopolistic competition, where all firms are identical. When the differentiated products ("varieties") are freely traded, are some of them produced by both countries? Based on your answer, what is one source of the welfare gains from free trade? B. Using Krugman's monopolistic competition model, draw a firm's average cost curve, and draw two demand curves: the demand curve it faces in an autarky equilibrium and the demand curve that it faces in a free trade equilibrium. Identify output and average cost levels under autarky and free trade. What does your diagram imply about how trade affects product prices? B. More recent research has extended Krugman's model to include heterogeneous firms, which differ in their productivity levels. In addition to the gains from trade in Krugman's model, what is another type of gains from trade when firm heterogeneity is modeled? What do researchers conclude about the relative importance of the different types of gains from trade? C. In our heterogeneous-firm model, which types of firms benefit from trade and which firms lose. Explain why.