Problem
A country currently imports automobiles at $8000 each. Its government believes domestic producers could manufacture autos for only $6000 given time but that there would be an initial shakedown period during which autos would cost $10,000 to produce domestically.
a. Suppose that each firm that tries to produce autos must go through the shakedown period of high costs on its own. Under what circumstances would the existence of the initial high costs justify infant industry protection?
b. Now suppose, on the contrary, that once one firm has borne the costs of learning to produce autos at $6000 each, other firms can imitate it and do the same. Explain how this can prevent development of a domestic industry, and how infant industry protection can help.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.