1. The precision machining industry exhibits external economies of scale because man- ufacturers benefit from a large pools of skilled operators and a competitive market for specialized equipment. As a consequence, average cost at the industry level is "forward-falling" in the quantity produced. There are two countries: Iceland and Sweden. Production costs are lower in Iceland, that is the average cost curve is everywhere lower in Iceland than Sweden, even though it is forward-falling in both countries. Draw market equilibrium diagrams for both countries, under autarky. Draw your di- agrams with a much higher level of demand in Sweden than in Iceland, so that the autarky price is lower in Sweden, even despite the higher costs. Once the two countries start trading, which country's industry will supply the consoli- dated, world-wide demand? Is this the best country at producing precision machining? Would a policy intervention aimed at relocating the industry to the other country ben- efit consumers