In the Krugman model of trade where there are economies of scale and monopolistic competition, which one of the following indicates the situation for the typical firm in the long run (where P = price of output, Q = quantity of output, W = the wage rate, and a and b are constants that are 0)?

Question

In the Krugman model of trade where there are economies of scale and monopolistic competition, which one of the following indicates the situation for the typical firm in the long run (where P = price of output, Q = quantity of output, W = the wage rate, and a and b are constants that are > 0)?

Quizplus · Accepted Answer

In the long run, firms in the Krugman model will produce at their minimum efficient scale and operate with zero economic profit. This means that their revenue (P ∙ Q) will equal their costs (W ∙ (a + bQ)). Therefore, we can rearrange the equation to get (a + bQ)∙W = P∙Q.

In the Krugman Model of Trade Where There Are Economies