Consider two countries in the monopolistic competition model: Home

and Foreign. All firms have the same fixed cost and marginal cost. In the short-run

equilibrium without trade, the number of firms selling products in Home is N1 and

that in Foreign is N2. However, the product price in the short-run without trade in

Home is higher than the average cost of Home firms, but that in Foreign is lower

than to the average cost of Foreign firms. Let N3 be the number of Home firms

in the long-run equilibrium without trade, and N4 be the number of Foreign firms

in the long-run equilibrium with trade. Rank N1, N2, N3 and N4. Explain your

reasoning.

2. (10 points) Rank the welfare of the entire country with the following protection

policies under perfect competition and explain your reasoning.

(a) Tariff t1 per unit of imports to a large country, and the equilibrium imported

quantity is M1 > 0. Assume that the tariff t1 is higher than the optimal tariff.

(b) Tariff t2 per unit of imports to a large country, and the equilibrium imported

quantity is M2 > M1 and M2 > 0.

(c) Tariff t3 per unit of imports to a large country, and the equilibrium imported

quantity is 0.