Question

Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?

Answer 1

Increasing returns to scale and fixed costs are important in models of international trade and imperfect competition:

Because increasing returns to scale and high fixed costs may be inconsistent with perfect competition. In such cases, initial autarkic state is sub optimal equilibrium. And relative prices may not equal to marginal rate of transformation. it follows that change in output compositions associated with trade may result in national welfare for one or both trading countries that is inferior to that associated with initial autarkic conditions. Therefore, "gains from trade".