If a country produces a commodity in the range of decreasing returns to scale, and the country begins to export more in a pure free trade system, the domestic price of the commodity will
A)fall.
B)rise.
C)exceed the price in foreign countries.
D)be below the price in foreign countries.
E)One cannot predict the impact on the price of the commodity.

Question

Quizplus · Accepted Answer

In a range of decreasing returns to scale, an increase in production leads to a relatively smaller increase in output, while the cost per unit of production increases. Therefore, as the country exports more, the domestic supply of the commodity will decrease, leading to a rise in the price of the commodity.

If a Country Produces a Commodity in the Range of Decreasing