Question

(8 points) Portland and Aleland are two identical countries. Beer manufacturers in each country compete under monopolistic competition. a.Suppose the two countries engage in trade. Describe the impact of free trade on consumers in Portland. b.How does trade affect the productivity of surviving domestic producers in Portland

Answer 1

Step-by-step explanation:

a) Consumers in Portland will gain from an increase in the varieties of beer available through importing. Additionally, prices will fall due to the increased competition.

b) By selling abroad, the producers in Portland will be able to lower their average costs through increasing returns to scale. However, they will face greater competition in their local market due to new varieties available from the import of beer from Aleland. As a result of the competition from Aleland, consumer demand for their variety decreases, thus driving their prices down.