Problem 1: External Economies of Scale & Trade

Suppose that there are external economies of scale in the production of motion pictures (films).The graph below shows the industry average cost curves in two countries.Suppose also that the world film industry originated in country A, where all 300 films per year are currently produced.However, as indicated by the graph, the cost of film production is potentially lower in country B due to B's greater relative endowment of natural artistic talent.

$14 $ mill. $13 per film $12 $11 $10 $9 $8 $7 $6 $5 $4 ACA $3 $2 ACB $1 DWorld 0 50 100 150 200 250 300 350 400 Q (industry # films per year)