Suppose that two countries, A and B, employ the same technology ...

[mp14]

Suppose that two countries, A and B, employ the same technology in the production of a good. External economies of scale apply in both countries.
 
  Analyze the effects of trade on long-run production levels if country A has a comparatively lower cost of production when trade begins.

Question 2

A government program that attempts to stimulate growth in the production of goods in which the country has a potential future comparative advantage is an example of a(n) ________ policy.
 
  A) primary-export-led
  B) import-substitution development
  C) outward-looking development
  D) linkage-effect

[lkoler]

Answer to Question 1

Initially, country B will have a comparative advantage in production of the good. Over time, as production shifts to Country B, costs will decline there while increasing in country A. In the absence of market intervention, country B will have a monopoly. Note that no individual firm will have a monopoly unless internal economies of scale also apply.

Answer to Question 2

C