ECOS3006 Week 6 Tutorial

1. Starting at long-run trade equilibrium in the monopolistic competition model,
consider what happens when industry demand decreases. For example, due to
the worldwide recession, there is a reduction in the demand for cars.

a. Draw the figure for the home market, and show the shift in the D/NT curve
and the new short-run equilibrium.

b. From the new short-run equilibrium, is there exit or entry of firms, and why?

c. Describe where the new long-run equilibrium occurs, and explain what has
happened to the number of firms and the prices they charge.



2. Last year the value of Australian export of travel and tourism was $41.7 billion
and the value of imports travel and tourism was $34.5 billion. The index of intra-
industry trade for this industry is then…











3. The distance between the China and Japan is 3045 kilometers and between
the USA and China, it is 11640 kilometers. American GDP is approximately
equal to $21 trillion, Japanese $5 trillion, and Chinese 14 trillion. Use the gravity
equation and compute by how much the expected volume of trade between
Japan and China will exceed the volume of trade between China and the US.
Assume that the distance elasticity is equal to 1.3.