Consider country A with a sector characterised by increasing returns to scale, where homogeneous firms produce...

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Consider country A with a sector characterised by increasing returns to scale, where homogeneous firms produce a differentiated good and operate under monopolistic competition. If the elasticity of substitution (1/(1-a)) is constant and higher than one (i.e., a € (0.1)), bilateral trade liberalisation with country B, characterised by the same preferences and technology, but one third the size of A (LA = 3LB): (a) makes varieties triple in B and welfare increase by less than 50 percent in A (b) makes varieties triple in A and welfare increase by less than 50 percent in B (c) makes varieties double and welfare less than double in both countries (d) none of the above Consider country A with a sector characterised by increasing returns to scale, where homogeneous firms produce a differentiated good and operate under monopolistic competition. If the elasticity of substitution (1/(1-a)) is constant and higher than one (i.e., a € (0.1)), bilateral trade liberalisation with country B, characterised by the same preferences and technology, but one third the size of A (LA = 3LB): (a) makes varieties triple in B and welfare increase by less than 50 percent in A (b) makes varieties triple in A and welfare increase by less than 50 percent in B (c) makes varieties double and welfare less than double in both countries (d) none of the above

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