Question

5. Free-trade benefits 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, Diamonique has market power as a local producer. Once free trade is implemented in the local economy, Diamonique is no longer able to raise its prices above competitive levels. The previous scenario represents which of the following benefits of free trade? Increased competition Lower costs through economies of scale Increased variety of goods An enhanced flow of ideas

Answer 1

Answer:

The correct answer is increased competition.

Explanation:

In the first scenario, Diamonique has local market power because there is no external competition. This way you can raise prices far above your costs. However, in the second scenario, by implementing free trade, Dominique has competition from foreign products, since free trade enables competition between domestic and foreign production, culminating in lower prices. Thus Dominique can no longer raise its prices due to competition made possible by free trade.