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-rQ where m=21, r=0.5, and Q indicates quantity. The demand curves are given by, respectively: Q = 6 - where b=10, P for Home and Q = 6*1P for Foreign, b*=13, and h=10. Q indicates quantity and Pindicates price.
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-rQ where m=21, r=0.5, and Q indicates quantity. The demand curves are given by, respectively: Q = 6 - where b=10, P for Home and Q = 6*1P for Foreign, b*=13, and h=10. Q indicates quantity and Pindicates price.
Chapter13: General Equilibrium And Welfare
Section: Chapter Questions
Problem 13.2P
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![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-rQ
where m=21, r=0.5, and Q indicates quantity. The demand curves are given by,
respectively:
Q = 6 -
P for Home and Q = 6*1P for Foreign,
where b=10, b*=13, and h=10. Q indicates quantity and Pindicates price.
Answer the following questions:
Assume that the countries are closed to international trade but they are
considering a trade agreement. If the countries open to trade, which country
will produce the good? Plot the cost and demand curves in a graph and use
the graph to rationalize your answer. [HINT: use the functional forms given in
the problem to draw your graph, and put quantity in the x-axis and price and
cost in the y-axis.]
b. The government of the country that may lose the industry anticipates the
outcome in a) and decides to introduce a subsidy to the industry to try to gain
advantage. In particular, the government offers to give a subsidy that reduces
the average cost of producing by S units. Indicate the minimum value of
the subsidy that would ensure that the country gets the industry.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9b2de2cc-8fab-44f8-bd7b-ae0b79fbc485%2F06271b37-dc17-499d-b8cc-598264d9e6b6%2Fhbhhj8o_processed.png&w=3840&q=75)
Transcribed Image Text: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-rQ
where m=21, r=0.5, and Q indicates quantity. The demand curves are given by,
respectively:
Q = 6 -
P for Home and Q = 6*1P for Foreign,
where b=10, b*=13, and h=10. Q indicates quantity and Pindicates price.
Answer the following questions:
Assume that the countries are closed to international trade but they are
considering a trade agreement. If the countries open to trade, which country
will produce the good? Plot the cost and demand curves in a graph and use
the graph to rationalize your answer. [HINT: use the functional forms given in
the problem to draw your graph, and put quantity in the x-axis and price and
cost in the y-axis.]
b. The government of the country that may lose the industry anticipates the
outcome in a) and decides to introduce a subsidy to the industry to try to gain
advantage. In particular, the government offers to give a subsidy that reduces
the average cost of producing by S units. Indicate the minimum value of
the subsidy that would ensure that the country gets the industry.
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