In addition to the positive welfare effects that free trade has on an economy, there are a variety of other benefits of international trade. Consider the following scenario:

Without free trade, Rooby has market power as a local producer. Once free trade is implemented in the local economy, Rooby is no longer able to raise its prices above competitive levels.

This scenario represents which of the following benefits of free trade?

a. Increased variety of goods

b. Enhanced flow of ideas

c. Increased competition

d. Lower costs through economies of scale

Question

Business

Fabian Hinton

20 June, 22:30

In addition to the positive welfare effects that free trade has on an economy, there are a variety of other benefits of international trade. Consider the following scenario:

Without free trade, Rooby has market power as a local producer. Once free trade is implemented in the local economy, Rooby is no longer able to raise its prices above competitive levels.

This scenario represents which of the following benefits of free trade?

a. Increased variety of goods

b. Enhanced flow of ideas

c. Increased competition

d. Lower costs through economies of scale

+3

Answers (1)

Know the Answer?

Augustus Reilly · Answer 1

Increased competition.

Explanation:

When there is increased competition in an economy a firm will not be able to raise the prices of their products above a certain level. If they do they will loose demand for their products because there is a substitute.

In this scenario Rooby had a market power similar to a monopoly as he was the only local producer. He could raise price as he wants and people had no choice but to buy.

When a new competitor came in he will not be able to raise hi prices because of substitute product.