3. Assume that an industry is characterized by external economies of scale. In autarky the price is 10 in country A and 15 in country B. Country A and B are equally large and consumers have the same preferences in both countries.

a) Describe what will likely happen to the location of industry if countries A and B start to trade with each other.

Explain your answer.

b) Describe how prices will change in the two countries.

Explain your answer.

c) How is the welfare of consumers in each country affected by opening up to trade?

d)

Could there potentially be an argument for subsidising production in this case for either

government? What would the logic be for such a subsidy?

Explain your answer.