Chapter 6: Economies of Scale, Imperfect Competition, and International Trade 1.

External economies of scale arise when the cost per unit A. rises as the industry grows larger. B. falls as the industry grows larger rises as the average firm grows larger. C. falls as the average firm grows larger. D. remains constant. E. None of the above. Answer B !. "nternal economies of scale arise when the cost per unit A. rises as the industry grows larger. B. falls as the industry grows larger. C. rises as the average firm grows larger. D. falls as the average firm grows larger. E. None of the above. Answer D #. External economies of scale A. may be associated with a perfectly competitive industry. B. cannot be associated with a perfectly competitive industry. C. tends to result in one huge monopoly. D. tends to result in large profits for each firm. E. None of the above. Answer A $. "nternal economies of scale A. may be associated with a perfectly competitive industry. B. cannot be associated with a perfectly competitive industry. C. are associated only with sophisticated products such as aircraft. D. cannot form the basis for international trade . E. None of the above. Answer B %. A monopolistic firm A. can sell as much as it wants for any price it determines in the mar&et. B. cannot determine the price' which is determined by consumer demand. C. will never sell a product whose demand is inelastic at the (uantity sold. D. cannot sell additional (uantity unless it raises the price on each unit. E. None of the above. Answer C

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+. ,onopolistic competition is associated with A. cut-throat price competition. B. product differentiation. C. explicit consideration at firm level of the feedbac& effects of other firms. pricing decisions. D. high profit margins. E. None of the above. Answer B ). /he most common mar&et structure is A. perfect competition. B. monopolistic competition. C. small-group oligopoly. D. perfectly vertical integration. E. None of the above. Answer C 0. ,odeling trade in monopolistic industries is problematic because A. there is no one generally accepted model of oligopoly behavior. B. there are no models of oligopoly behavior. C. it is difficult to find an oligopoly in the real world. D. collusion among oligopolists ma&es usable data rare. E. None of the above. Answer A 1. 2here there are economies of scale' the scale of production possible in a country is constrained by A. the si3e of the country. B. the si3e of the trading partner.s country. C. the si3e of the domestic mar&et. D. the si3e of the domestic plus the foreign mar&et. E. None of the above. Answer D 1*. 2here there are economies of scale' an increase in the si3e of the mar&et will A. increase the number of firms and raise the price per unit. B. decrease the number of firms and raise the price per unit. C. increase the number of firms and lower the price per unit. D. decrease the number of firms and lower the price per unit. E. None of the above. Answer C

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11. /he simultaneous export and import of widgets by the 4nited 5tates is an example of A. increasing returns to scale. B. imperfect competition. C. intra-industry trade. D. inter-industry trade. E. None of the above. Answer C 1!. "f output more than doubles when all inputs are doubled' production is said to occur under conditions of A. increasing returns to scale. B. imperfect competition. C. intra-industry trade. D. inter-industry trade. E. None of the above. Answer A 1#. "ntra-industry trade can be explained in part by A. transportation costs within and between countries. B. problems of data aggregation and categori3ation. C. increasing returns to scale. D. All of the above. E. None of the above. Answer D 1$. "f some industries exhibit internal 6firm specific7 increasing returns to scale in each country' we should not expect to see A. intra-industry trade between countries. B. perfect competition in these industries. C. inter-industry trade between countries. D. high levels of speciali3ation in both countries. E. None of the above. Answer B 1%. "ntra-industry trade is most common in the trade patterns of A. developing countries of Asia and Africa. B. industrial countries of 2estern Europe. C. all countries. D. North-5outh trade. E. None of the above. Answer B

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1+. "nternational trade based on scale economies is li&ely to be associated with A. 8icardian comparative advantage. B. comparative advantage associated with 9ec&scher-:hlin factorproportions. C. comparative advantage based on (uality and service. D. comparative advantage based on diminishing returns. E. None of the above. Answer E 1). "nternational trade based on external scale economies in both countries is li&ely to be carried out by a A. relatively large number of price competing firms. B. relatively small number of price competing firms. C. relatively small number of competing oligopolists. D. monopoly firms in each country;industry. E. None of the above. Answer A 10. "nternational trade based solely on internal scale economies in both countries is li&ely to be carried out by a A. relatively large number of price competing firms. B. relatively small number of price competing firms. C. relatively small number of competing oligopolists. D. monopoly firms in each country;industry. E. None of the above. Answer D 11. A monopoly firm engaged in international trade will A. e(uate average to local costs. B. e(uate marginal costs with foreign marginal revenues. C. e(uate marginal costs with the highest price the mar&et will bear. D. e(uate marginal costs with marginal revenues in both domestic and in foreign mar&ets. E. None of the above. Answer D

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!*. A monopoly firm will maximi3e profits by A. charging the same price in domestic and in foreign mar&ets. B. producing where the marginal revenue is higher in foreign mar&ets. C. producing where the marginal revenue is higher in the domestic mar&et. D. e(uating the marginal revenues in domestic and foreign mar&ets. E. None of the above. Answer D !1. A firm in monopolistic competition A. earns positive monopoly profits because each sells a differentiated product. B. earns positive oligopoly profits because each firm sells a differentiated product. C. earns 3ero economic profits because it is in perfectly or pure competition. D. earns 3ero economic profits because of free entry. E. None of the above. Answer D !!. /he larger the number of firms in a monopolistic competition situation' A. the larger are that country.s exports. B. the higher is the price charged. C. the fewer varieties are sold. D. the lower is the price charged. E. None of the above. Answer D !#. /he monopolistic competition model is one in which there is;are A. a monopoly. B. perfect competition. C. economies of scale. D. government intervention in the mar&et. E. None of the above. Answer C

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!$. "n industries in which there are scale economies' the variety of goods that a country can produce is constrained by A. the si3e of the labor force. B. anti-trust legislation C. the si3e of the mar&et. D. the fixed cost. E. None of the above. Answer C !%. An industry is characteri3ed by scale economies' and exists in two countries. 5hould these two countries engage in trade such that the combined mar&et is supplied by one country.s industry' then A. consumers in both countries would suffer higher prices and fewer varieties. B. consumers in the importing country would suffer higher prices and fewer varieties. C. consumers in the exporting country would suffer higher prices and fewer varieties. D. consumers in both countries would en<oy fewer varieties available but lower prices. E. None of the above. Answer E !+. An industry is characteri3ed by scale economies and exists in two countries. "n order for consumers of its products to en<oy both lower prices and more variety of choice' A. each country.s marginal cost must e(ual that of the other country. B. the marginal cost of this industry must e(ual marginal revenue in the other. C. the monopoly must lower prices in order to sell more. D. the two countries must engage in international trade one with the other. E. None of the above. Answer D

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!). A product is produced in a monopolistically competitive industry with scale economies. "f this industry exists in two countries' and these two countries engage in trade one with the other' then we would expect A. the country in which the price of the product is lower will export the product. B. the country with a relative abundance of the factor of production in which production of the product is intensive will export this product. C. each of the countries will export different varieties of the product to the other. D. neither country will export this product since there is no comparative advantage. E. None of the above. Answer C !0. /he reason why one country may export a product which is produced with positive scale economies is A. its labor productivity will tend to be higher. B. it en<oys a relative abundance of the factor intensely used in the product.s production. C. its demand is biased in favor of the product. D. its demand is biased against the product. E. None of the above. Answer E !1. /wo countries engaged in trade in products with no scale economies' produced under conditions of perfect competition' are li&ely to be engaged in A. monopolistic competition. B. inter-industry trade. C. intra-industry trade. D. 9ec&scher-:hlin trade. E. None of the above. Answer B #*. /wo countries engaged in trade in products with scale economies' produced under conditions of monopolistic competition' are li&ely to be engaged in A. price competition. B. inter-industry trade. C. intra-industry trade. D. 9ec&scher-:hlinean trade. E. None of the above. Answer C

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#1. 9istory and accident determine the details of trade involving A. 8icardian and Classical comparative advantage. B. 9ec&scher-:hlin model consideration. C. taste reversals. D. scale economies. E. None of the above. Answer D #!. 2e often observe intra-industry North-5outh trade in =computers and related devices.= /his is due to A. classification and aggregation ambiguities. B. monopolistic competition. C. specific factors issues. D. scale economies. E. None of the above. Answer A ##. 2e often observe =pseudo-intra-industry trade= between the 4nited 5tates and ,exico. Actually' such trade is consistent with A. oligopolistic mar&ets. B. comparative advantage associated with 9ec&scher-:hlin model. C. optimal tariff issues. D. huge suc&ing sound. E. None of the above. Answer B #$. "ntra-industry trade will tend to dominate trade flows when which of the following exists> A. ?arge differences between relative country factor availabilities B. 5mall differences between relative country factor availabilities C. 9omogeneous products that cannot be differentiated D. Constant cost industries E. None of the above. Answer B #%. /he most common form of price discrimination in international trade is A. non-tariff barriers. B. @oluntary Export 8estraints. C. dumping. D. preferential trade arrangements. E. None of the above.

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Answer C

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Essay Questions 1. 2hy is it that an industry is operating under conditions of domestic internal scale economies 6applies to firm in the country7 - then the resultant e(uilibrium cannot be consistent with the pure competition model> Answer Because once one firm became bigger than another' or if one firm began the industry' then no other firm would be able to match its per unit cost' so that they would be driven out of the industry. !. "s it possible that if positive scale economies characteri3e an industry' that its e(uilibrium may be consistent with purely competitive conditions > Explain how this could happen. Answer Aes. "f the scale economies were external to the firm' then there is no reason why the firms may not be in perfect competition. #. "f a scale economy is the dominant technological factor defining or establishing comparative advantage' then the underlying facts explaining why a particular country dominates world mar&ets in some product may be pure chance' or historical accident. Explain' and compare this with the answer you would give for the 9ec&scher-:hlin model of comparative advantage. Answer /his statement is true' since the reason the seller is a monopolist may be that it happened to have been the first to produce this product in this country. "t may have no connection to any supply or demand related factorsB nor to any natural or man-made availability. /his is all exactly the opposite of the 9ec&scher-:hlin Neo-Classical model.s explanation of the determinants of comparative advantage. $. "t is possible that trade based on external scale economies may leave a country worse off than it would have been without trade. Explain how this could happen. Answer :ne answer is that the terms of trade effects may dominate any other factors. %. "f scale economies were not only external to firms' but were also external to individual countries. /hat is' the larger the worldwide industry 6regardless of where firms or plants are located7' the cheaper would be the per-unit cost of production. Describe what world trade would loo& li&e in this case. Answer Cresumably each country would speciali3e in some component of the final product. /his would result in much observed intra-industry trade.

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Quantitative/Graphing ro!lems

1. /he figure above represents the demand and cost functions facing a Bra3ilian 5teel producing monopolist. "f it were unable to export' and was constrained by its domestic mar&et' what (uantity would it sell at what price> Answer "t would sell % 6million tons7 at a price of D0;ton. !. Now the monopolist discovers that it can export as much as it li&es of its steel at the world price of D%;ton. "t will therefore expand for- export production up to the point where its marginal cost e(uals D%. 9ow much steel will the monopolist sell' and at what price> Answer "t would sell 1* million tons at D%;ton. #. Eiven the opportunity to sell at world prices' the marginal 6opportunity7 cost of selling a ton domestically is what> Answer D%;ton. $. 2hile selling exports it would also maximi3e its domestic sales by e(uating its marginal 6opportunity7 cost to its marginal revenue of D%. 9ow much steel would the firm sell domestically' and at what price> Answer $ million tons at D1*;ton.

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%. /he Bra3ilian firm is charging its foreign 64.5.7 customers one half the price it is charging its domestic customers. "s this good or bad for the real income or economic welfare of the 4nited 5tates> "s the Bra3ilian firm engaged in dumping> "s this predatory behavior on the part of the Bra3ilian steel company> Answers Eood. Aes' if you define dumping as selling abroad at a price lower than domestically. No' if by dumping you mean selling below marginal cost. No - this is not being done in order to capture mar&et shares' but rather is =mere= static profit maximi3ation behavior' as is expected of any self-respecting monopolist.

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