Question 2 [10 points] Consider the setup of the increasing returns model as discussed in class. The consumer has utility function U (60,61 ,9..., Cm) 5 in 3 cy") + Inco (c) + Inco with b= 1. The representative consumer in each country is endowed with I = 50 units of labor. The technology for producing each variety of manufactured good is qi = max {li 5,0}, with f= 1, and x = 2. Firms producing manufacturing goods are Cournot competitors, and there is free entry in manufacturing. The technology for producing the agricultural good (good 0) is qo = lo. Firms producing agriculture are perfectly competitive. (a) Solve the consumer's problem to determine the inverse demand function for each good. (b) Solve the firms' profit maximization problems to find the quantity and price of each good produced (both agriculture and manufacturing) as a function of the number of manufacturing firms. (c) Opening to trade increases the number of firms producing manufacturing goods. (You do not have to solve for the number of firms here.) Use your answers to (a) and (b) to explain the two ways that this increase makes consumers gain from international trade in this model Question 2 [10 points] Consider the setup of the increasing returns model as discussed in class. The consumer has utility function U (60,61 ,9..., Cm) 5 in 3 cy") + Inco (c) + Inco with b= 1. The representative consumer in each country is endowed with I = 50 units of labor. The technology for producing each variety of manufactured good is qi = max {li 5,0}, with f= 1, and x = 2. Firms producing manufacturing goods are Cournot competitors, and there is free entry in manufacturing. The technology for producing the agricultural good (good 0) is qo = lo. Firms producing agriculture are perfectly competitive. (a) Solve the consumer's problem to determine the inverse demand function for each good. (b) Solve the firms' profit maximization problems to find the quantity and price of each good produced (both agriculture and manufacturing) as a function of the number of manufacturing firms. (c) Opening to trade increases the number of firms producing manufacturing goods. (You do not have to solve for the number of firms here.) Use your answers to (a) and (b) to explain the two ways that this increase makes consumers gain from international trade in this model