Let us begin with a naive story about an imaginary country named Webertopia. This country is situated along a very narrow valley-corridor h kilometres in length, which makes the geographical territory of Webertopia appear as if it is a horizontal line. At one end of the valley-corridor exists city A which sits continguous to the boundary of country AA, while city B sits at the other end of the corridor contiguous to country BB. In city A, a licensed factory M A produces the fixed amount q z of commodity z every day for export to country AA. In city B, we have a licensed factory M B producing daily the amount q z of z for export to country BB. The conditions of the licence issued to M A require that the commodity z produced by M A should be sold at a fixed unit price p z to an importer I A from country AA who comes to city A every day to purchase the product. The similar conditions must be met by factory M B with respect to importer I B from country BB. The average cost to produce commodity z is c1 for both factories when they are operated separately. If the two factories were to go into joint production at a single location within the national boundary of Webertopia, the average production cost would turn out to be c2.
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