### Government budget at the equilibrium level of income

##### Reference no: EM139071

Q1. Explain how does an increase in transport costs change the gains from trade in Melitz's (2003) model? Are the effects of an increase in transport costs qualitatively different from the effects of an increase in the fixed cost of becoming an exporter? Explain.

Q2. Assume a stream is discovered whose water has remarkable healing power? You decide to bottle the liquid and sell it. The market demand is linear and is given as P=30-Q! The marginal cost to produce this drink new drink is 3\$. Illustrate cost would this new drink sell for if it sold in a competitive market? Illustrate what is the monopoly cost of this new drink?

Q3. Is there a surplus or deficit in the government budget at the equilibrium level of income? Explain how much?

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