Purpose: To discuss why international trade often occurs from increasing returns to scale. To understand the differences between internal and external economies of scale and discuss their roles in shaping comparative advantage and international trade patterns. Understand how external economies of scale leads to international trade and recognize the welfare gains/losses from trade. Question Consider a world with two countries only: China and India. Assume that zippers production is subject to external economies to scale (with many producers) which led to a downward sloping supply curve for zippers in each country. The demand for zippers and the average cost function in each country are given by the following equations: Demand Average Cost China QChina = 12000 9000 AC China = 1 + Q 6000 4000 India Qindia = AC India = 1 + P Q where Q is the quantity of zippers, and P is the price in dollars per unit. a. What would be the equilibrium price and quantity in each country if the two economies were closed (autarky)? b. Suppose both markets are in equilibrium initially. What do you expect to happen to the production of zippers in each country if they open their economies to trade? Find the world equilibrium price and the quantity consumed in each country in the long-run and use graphs to illustrate your answer). C. How would your answer to part (b) change if before the opening to trade, the market in India wasn't in equilibrium as they were producing only 800 units? Show your work! d. Based on your answer in part (c) what would you recommend the Indian government to do? (assuming that the production level is initially equal to 800).