Gains from trade in the model of monopolistic competition are driven by Group of answer choices geographical proximity higher variety in consumption goods differences in technology difference in resource endowment
Question
Gains from trade in the model of monopolistic competition are driven by
Group of answer choices
geographical proximity
higher variety in consumption goods
differences in technology
difference in resource endowment
Solution
The gains from trade in the model of monopolistic competition are driven by higher variety in consumption goods.
Here's why:
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Monopolistic competition is a market structure in which many firms sell products that are similar but not identical. Each firm has a monopoly on its own product, but competes with other firms in terms of product differentiation.
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In this model, consumers value variety. They derive utility not just from consuming more of a good, but also from consuming a wider variety of goods.
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When trade opens up, firms can sell their products to a larger market. This allows for more firms to operate profitably, each producing a different variety of the good.
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As a result, the variety of consumption goods available to consumers increases. This increased variety is a source of gains from trade in the model of monopolistic competition.
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Therefore, the answer is "higher variety in consumption goods".
The other options - geographical proximity, differences in technology, and difference in resource endowment - are not the primary drivers of gains from trade in this model.
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