Problem
Internal economies with firms of different marginal costs:
• Show, using a demand curve diagram, what happens when a country goes from open to trade to being closed to trade in the internal economies model with firms of different marginal costs. In particular, explain what happens to different types of firms (i.e. high versus low marginal cost firms).
• In the internal economies of scale model with firms with different marginal costs as well as a per-unit trade cost t that must be paid to export, explain what happens when the trade cost t decreases. In particular, explain how this affects different types of firms on the domestic and the export markets, and whether some types of firms now begin or stop exporting. Draw diagrams to support your arguments.