When the nation of Duxembourg allows trade and becomes an importer of software, which of the following is most likely to occur in the domestic software market?

• A. Domestic producers experience higher profits due to increased demand.
• B. The quantity of software produced domestically increases.
• C. Domestic consumers benefit from lower prices and increased variety.
• D. The domestic price of software rises above the world price.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of comparative advantage and how opening to trade affects domestic markets. When a country becomes an importer of a good, it means the world price is lower than the domestic price without trade.
2. Step 2: Recognize that if Duxembourg imports software, the domestic price will tend to fall to the world price level, benefiting consumers with lower prices and more variety.
3. Step 3: Analyze the impact on domestic producers: since the domestic price falls to the world price, domestic producers face more competition and typically produce less, which can reduce their profits.
4. Step 4: Understand that the quantity produced domestically usually decreases because consumers buy more from the cheaper foreign suppliers, so domestic production contracts rather than expands.
5. Step 5: Conclude that the most likely outcome is that domestic consumers benefit from lower prices and increased variety, while domestic producers face lower prices and reduced production.