General Equilibrium Models of Monopolistic Competition: CRRA Versus Cara
CORE Discussion Paper No. 2005/33
15 Pages Posted: 15 Nov 2005
Date Written: April 2005
We analyze a class of 'large group' Chamberlinian monopolistic competition models using multiplicatively quasi-separable (MQS) and additively quasi-separable (AQS) functions. We first prove that the MQS and AQS functions are equivalent to the 'constant relative risk aversion' (CRRA) and 'constant absolute risk aversion' (CARA) classes of functions, respectively. Whereas both approaches allow for closed-form solutions, only the AQS functions yield profit-maximizing prices that decrease in the mass of competing firms. We then characterize the equilibrium in both cases and discuss some possible applications of the AQS framework to trade, growth, and development.
Keywords: monopolistic competition, general equilibrium, price equilibrium,additive quasi-separability, multiplicative quasi-separability
JEL Classification: D43, D50, L13, L16
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