Go back to the model with firm performance differences in a single integrated market (pp. 206–208). Now assume a new technology becomes available. Any firm can adopt the new technology, but its use requires an additional fixed-cost investment.

The benefit of the new technology is that it reduces a firm’s marginal cost of production by a given amount.

a. Could it be profit maximizing for some firms to adopt the new technology but not profit maximizing for other firms to adopt that same technology? Which firms would choose to adopt the new technology? How would they be different from the firms that choose not to adopt it?

b. Now assume there are also trade costs. In the new equilibrium with both trade costs and technology adoption, firms decide whether to export and also whether to adopt the new technology. Would exporting firms be more or less likely to adopt the new technology relative to nonexporters? Why? LO.1