Question: Consider two countries: Home and Foreign. Start from the short-run equilibrium without trade in the monopolistic competition model. In the short-run equilibrium, the number of

Consider two countries: Home and Foreign. Start from the short-run

equilibrium without trade in the monopolistic competition model. In the short-run

equilibrium, the number of firms selling products in Home is N1. These firms have

the same fixed cost and marginal cost. Suppose that the product price in Home is

lower than the average cost of Home firms, but the product price in Foreign is equal

to the average cost of Foreign firms. Let N2 be the number of firms in the Home

country in the long-run equilibrium without trade, and N3 be the number of firms

in the Home country in the long-run equilibrium with trade. Rank N1, N2 and N3.

Explain your reasoning.

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