Couldn\'t reload picture 1 first graph word is operating profit Curve C\' move t

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Couldn't reload picture

1 first graph word is operating profit Curve C' move to C''

2 second graph upper bond word is operationg profit( domestic)

lower bond word word is operating profit( export)

3 Second graph Y axis represent Price

4 Second graph X axis from left to right lable is C ,c'-i, C", C C' something like that

Thank you very much

a) Melitz and Trefler argue that a move from no trade to free trade will cause firm operating profits to change as illustrated. (This illustration relates to trade between two similar size countries in the absence of trade costs or tariffs). Explain why operating profit rotates from the solid line (before trade) to the dashed line (after trade). b) Based on the diagram, which firms are "winners" or "losers" liberalization. Label all groups in the top diagram. Which firms are caused to exit following trade c) Now consider the case where firms are involved in trade, both trading countries are similar in size, but exports face a trade cost t. Using the information on this scenario, label the Exiting firms in the diagram below.

Explanation / Answer

1) When international trade occurs, a large market appears with more competition. This will lead to change in residual demand of each firm. Additionally, the residual demand will be rotate out for all firms. Thiw iwll make smaller firms producing lower output than operating at higher demand curve. This change in demand will have consequence over the profit with different cost. This decrese in demand will translate into new lower cost cutoff c''. firms with highst cost level cannot survive the decrease in demand and are forced to exit (above c''). On other hand flatter demand is advantageous to firms with lowest cost levels. Thus the best performing firms with lowest cost now get increased operating profit. the graph illustartes how increased market size generate both winners and loosers aongs firms in an industry.

b) The firms having dashed line operaing profit above solid line operating profit are winners and loosers have dashed line operating profit below solid line operating profit.

Firms whose profit curve is differnce between dashed line and solid line curves will have to exit the market.

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