With increasing returns (falling average costs), international trade will cause the demand curves of monopolistically competitive firms to become _______________ because of foreign competition and firms must _______________to meet foreign competition.
A) steeper; raise prices
B) flatter; lower prices
C) flatter; raise prices
D) steeper; lower prices

Question

Quizplus · Accepted Answer

With increasing returns (falling average costs), international trade introduces more competition, causing the demand curves of monopolistically competitive firms to become flatter, indicating increased elasticity of demand. Firms must lower prices to remain competitive in the face of this increased foreign competition.

With Increasing Returns (Falling Average Costs), International Trade Will Cause