Consider a situation in which two countries, Home and Foreign, can produce a goodthat is subject to external economies of scale. Assume that firms in both countriesface the same average costs curve (AC), given by:AC=m-rQwhere 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 areconsidering a trade agreement. If the countries open to trade, which countrywill produce the good? Plot the cost and demand curves in a graph and usethe graph to rationalize your answer. [HINT: use the functional forms given inthe problem to draw your graph, and put quantity in the x-axis and price andcost in the y-axis.]b. The government of the country that may lose the industry anticipates theoutcome in a) and decides to introduce a subsidy to the industry to try to gainadvantage. In particular, the government offers to give a subsidy that reducesthe average cost of producing by S units. Indicate the minimum value ofthe subsidy that would ensure that the country gets the industry.

The first step is to define the functions that will represent the average cost (AC) and demand for…

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 = 61P for Foreign, b=13, and h=10. Q indicates quantity and Pindicates price.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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