Question

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, Sapphira has market power as a local producer. Once free trade is implemented in the local economy, Sapphira is no longer able to raise its prices above competitive levels. Answer choices shown below1. Increased competition2. Increased variety of goods3.Lower costs through economies of scale4. Enhanced flow of ideas

Answer 1

Answer: increased competition

Explanation:

Without the existence of a free trade, Sapphira is acting in the capacity of a monopolistic seller and as such can fix price at whatever level she wants to fix it. This changes with the introduction of free trade, as similar products are allowed to come in with lower prices and in order to keep up she has to lower her prices also.

Answer 2

Answer:

Increased Competition

Explanation:

Free trade is very important and has various positives on the welfare of an economy. One benefit of free trade is increased competition. When domestic monopolies begin to face stiff competition from new entrants from other countries, competition is increased and hence organization will cut cost and try to be highly efficient in its services. In the case of Sapphira, free trade has ensured that they are unable to increase their prices above competition, a benefit of free trade known as increased competition.