If two countries begin trade and both produce a product subject to external economies of scale, then the country with the ________ rate of production will ________ production until it controls ________ of the market.
A) higher; increase; 100%
B) higher; increase; 50%
C) lower; increase; 100%
D) lower; increase; 50%
E) higher; decrease; 0%

Question

Quizplus · Accepted Answer

When two countries start trading a product subject to external economies of scale, the country with the higher initial rate of production will find it advantageous to increase production. This is because external economies of scale mean that as the output increases, the average costs of production decrease. Therefore, the country with the higher production rate can produce more efficiently and at a lower cost, allowing it to outcompete the other country and eventually control 100% of the market.

If Two Countries Begin Trade and Both Produce a Product