What are the benefits of international trade in this case

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Reference no: EM133504596

Case: 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+(r/(s+Q))

where m=3, r=20, s=2 and Q indicates quantity.

The demand curves are given by, respectively:

Home: Q= b-P

Foreign Q = b*-P

where b=20 and b*=40 . Q indicates quantity and P indicates price.

Plot the AC curve and the demand curve for both Home and Foreign in the same graph (put quantity in the x-axis and price and cost in the y-axis.
Assume that both countries are closed to international trade. Compute the equilibrium price and quantity in both countries.
Assume that these two countries open to trade with each other. Which country will produce the good? Explain why.
What are the benefits of international trade in this case? Do they accrue only to the country that gets the industry?

Reference no: EM133504596

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