Trade Theory and Policy - Intra Industry Trade

Exercise:

Within the context of the Canada-EU trade agreement, the EU decided to substantially reduce its high import barriers against the import of meat from Canada. Canada's import tariff on meat from the EU is small and has NO significant implication. Consider that there are N1 firms in the EU and N2 firms in Canada, all having the same productivity (i.e. marginal cost), and each produces a unique variety of meat. Furthermore, assume that there is free firm entry and exit. Firms operate under increasing return to scale due to the presence of their fixed cost. Suppose you are appointed as a government consultant to analyze the impact of EU meat trade policy on the EU market. Please analyze the impact on industry output and price, variety as well as welfare. Use a graph for your analysis.