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-Please draw the graph for the answer Consider a situation in which two countries, Home and Foreign, can produce a good that is subject to
-Please draw the graph for the answer
Consider a situation in which two countries, Home and Foreign, can produce a good that is subject to external economies of scale. Assume that firms in both countries face the same average costs curve (AC), given by
AC = m+r/s+Q
where m=3, r=20, s=2 and Q indicates quantity. The demand curves are given by, respectively:
Home: Q= b-P
Foreign Q = b*-P
whereb=20and b*=40 .Q indicates quantity and P indicates price
- Plot the AC curve and the demand curve for both Home and Foreign in the same graph (put quantity in the x-axis and price and cost in the y-axis.
- Assume that both countries are closed to international trade. Compute the equilibrium price and quantity in both countries.
- Assume that these two countries open to trade with each other. Which country will produce the good? Explain why.
- What are the benefits of international trade in this case? Do they accrue only to the country that gets the industry?
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