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.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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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.
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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