Question: 1. (25 marks) Assume that the computer software industry is perfectly competitive and exhibits external scale economies. Brazil (B) has a lower average cost than

1. (25 marks) Assume that the computer software industry is perfectly competitive and exhibits external scale economies. Brazil (B) has a lower average cost than the USA. (A) in computer software. The average cost of country j is given by where is the output of software of country j, j = a, b, with (3) The Brazilian market for software is of the same size of the US. market. The US. has a head start in the industry and initially produces for the world market at the price P0. a. (12 marks) Do you expect that the US. firms will be displaced by the Brazilian rms under free trade? How would your answer depend on and P0? Illustrate your answer in diagrams. b. (13 marks) Suppose Brazil adopts an infant industry policy and protects its software industry from foreign competition. After the no-trade equilibrium is reached, the protectionist policy is abolished and Brazil will be integrated into the world market. Will the Brazilian rms displace the American firms now

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