3. Consider a U.S. firm’s production of automobiles, including research and development and component production.

a. Starting from a no-trade equilibrium in a PPF diagram, illustrate the gains from offshoring if the United States has a comparative advantage in component production.

b. Now suppose that advances in engineering abroad decrease the relative price of research and development. Illustrate this change on your diagram and state the implications for production in the United States.

c. Does the U.S. firm gain from advances in research and development abroad? Explain why or why not.