Let EQ1: Markup rule: Pi = c + 1/nb and EQ2: FREE ENTRY: Pi= nF/Q + c
a. Depict and explain the ‘mark-up rule’ and the ‘zero profit condition’. Explain how this
determines the equilibrium number of varieties
b. Solve for n: show that N rises if Q rises, F falls, or b rises. Provide the intuition.
c. If Q= 1000, b = 4 and F = 25 what is n?
d. Now let Q double. What is the new n? Why did it not also double? Intuition?
e. How do we use this model to explain intra-industry trade?
f. Who exports what variety?
g. How does trade alter labour productivity?
h. How does trade alter nominal and real wages?
i. What are the gains from trade in this model?

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