Suppose country A had been traditionally enjoying a comparative advantage in the production of good X. As a result most of the large firms manufacturing and exporting good X were concentrated in country A. However, recently it has been observed that the comparative advantage in the production of good X has shifted to country B owing better factor availability and lower input prices. Some new firms are contemplating to start operating in country B. Which of the following conditions probably must be fulfilled to ascertain that these new firms will enjoy cost advantage over the established firms in country A?

Question

Quizplus · Accepted Answer

The most important factor for new firms to enjoy cost advantage over established firms in country A is the ability to achieve scale economies. For this, the output level of the new firms in country B should be large enough. Therefore, option D is the best choice. Option A is not relevant as the number of firms has no direct impact on cost advantage. Option B is also not relevant as the consumers' demand elasticity does not affect the cost advantage of the firms. Option C is partially correct as firms with higher input-output ratio have better cost efficiency, but this alone will not guarantee cost advantage over established firms without achieving scale economies.

Suppose Country a Had Been Traditionally Enjoying a Comparative Advantage