Q1.

In the new economic geography (NEG) model, spatial interdependencies are a key ingredient.

a. Discuss how these spatial interdependencies, in their role as transport costs, drive the agglomeration outcomes in Krugman's core NEG model. (50%)

With respect to Krugman’s new economic geography model:

• Discuss what the assumption of internal increasing returns to scale (IRS) implies for i) the location behaviour of firms and ii) the market structure. (50%)                                                                                                        

• Discuss how firms could still care about their location even in the absence of IRS. (50%)