Consider a situation in which Home is initially completely closed to trade and then opens up completely with another nation that is identical to it. Assume firms face scale economies and imperfect competition and that the equilibrium is described by the figure below.
Use the diagram to answer the questions; in particular refer to the areas and points in the diagram.
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| 9 | After the no-trade-to-free-trade liberalisation and after industrial restructuring takes place, the new, long-run domestic price is . |
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| 10 | After the no-trade-to-free-trade liberalisation the new, long-run number of firms in both nations is . |
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| 11 | After industrial restructuring takes place, the long-run gain in domestic welfare is given by the areas . |
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| 12 | The new long-run average cost per firm is and the new output-per-firm level is . |
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| 13 | In the new long-run equilibrium there are fewer firms than before, but each produces more than it did before; we know the total output has risen because the price is , so consumption must be . |
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| 14 | Although the economy would never be at point 1, we know that this is one point on the post-liberalisation BE curve since, although there twice as many firms at point 1, the level of sales per firm is because there are now markets instead of one. |
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| 15 | When firms are breaking even, we know that price must equal cost. |
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| 16 | Firms can still break even despite the drop in price since average costs and sales per firm . |
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| 17 | What is the loss in producer surplus? |
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| 18 | If the liberalisation took place, but no firms exited initially, the price would fall to |
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| 19 | The average cost curve is downward sloped with scale economies because: |
 | A) | the higher per-firm output allows the fixed costs to be spread over more units |
| B) | markups falls as firm-level output rises |
| C) | of changes in the demand for goods when prices rise |
| D) | firms are profit maximisers |