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 2. Internal 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 3. 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 4. Internal 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 5. A monopolistic firm A. can sell as much as it wants for any price it determines in the market. B. cannot determine the price, which is determined by consumer demand. C. will never sell a product whose demand is inelastic at the quantity sold. D. cannot sell additional quantity unless it raises the price on each unit. E. None of the above. Answer: C
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6. Monopolistic competition is associated with A. cut-throat price competition. B. product differentiation. C. explicit consideration at firm level of the feedback effects of other firms' pricing decisions. D. high profit margins. E. None of the above. Answer: B 7. The most common market structure is A. perfect competition. B. monopolistic competition. C. small-group oligopoly. D. perfectly vertical integration. E. None of the above. Answer: C 8. Modeling 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 makes usable data rare. E. None of the above. Answer: A 9. Where there are economies of scale, the scale of production possible in a country is constrained by A. the size of the country. B. the size of the trading partner's country. C. the size of the domestic market. D. the size of the domestic plus the foreign market. E. None of the above. Answer: D 10. Where there are economies of scale, an increase in the size of the market 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. The simultaneous export and import of widgets by the United States 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 12. If 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 13. Intra-industry trade can be explained in part by A. transportation costs within and between countries. B. problems of data aggregation and categorization. C. increasing returns to scale. D. All of the above. E. None of the above. Answer: D 14. If some industries exhibit internal (firm specific) 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 specialization in both countries. E. None of the above. Answer: B 15. Intra-industry trade is most common in the trade patterns of A. developing countries of Asia and Africa. B. industrial countries of Western Europe. C. all countries. D. North-South trade. E. None of the above. Answer: B
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16. International trade based on scale economies is likely to be associated with A. Ricardian comparative advantage. B. comparative advantage associated with Heckscher-Ohlin factorproportions. C. comparative advantage based on quality and service. D. comparative advantage based on diminishing returns. E. None of the above. Answer: E 17. International trade based on external scale economies in both countries is likely 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 18. International trade based solely on internal scale economies in both countries is likely 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 19. A monopoly firm engaged in international trade will A. equate average to local costs. B. equate marginal costs with foreign marginal revenues. C. equate marginal costs with the highest price the market will bear. D. equate marginal costs with marginal revenues in both domestic and in foreign markets. E. None of the above. Answer: D
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20. A monopoly firm will maximize profits by A. charging the same price in domestic and in foreign markets. B. producing where the marginal revenue is higher in foreign markets. C. producing where the marginal revenue is higher in the domestic market. D. equating the marginal revenues in domestic and foreign markets. E. None of the above. Answer: D 21. 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 zero economic profits because it is in perfectly or pure competition. D. earns zero economic profits because of free entry. E. None of the above. Answer: D 22. The 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 23. The 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 market. E. None of the above. Answer: C
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24. In industries in which there are scale economies, the variety of goods that a country can produce is constrained by A. the size of the labor force. B. anti-trust legislation C. the size of the market. D. the fixed cost. E. None of the above. Answer: C 25. An industry is characterized by scale economies, and exists in two countries. Should these two countries engage in trade such that the combined market 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 enjoy fewer varieties available but lower prices. E. None of the above. Answer: E 26. An industry is characterized by scale economies and exists in two countries. In order for consumers of its products to enjoy both lower prices and more variety of choice, A. each country's marginal cost must equal that of the other country. B. the marginal cost of this industry must equal 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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27. A product is produced in a monopolistically competitive industry with scale economies. If 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 28. The 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 enjoys 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 29. Two countries engaged in trade in products with no scale economies, produced under conditions of perfect competition, are likely to be engaged in A. monopolistic competition. B. inter-industry trade. C. intra-industry trade. D. Heckscher-Ohlin trade. E. None of the above. Answer: B 30. Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in A. price competition. B. inter-industry trade. C. intra-industry trade. D. Heckscher-Ohlinean trade. E. None of the above. Answer: C
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31. History and accident determine the details of trade involving A. Ricardian and Classical comparative advantage. B. Heckscher-Ohlin model consideration. C. taste reversals. D. scale economies. E. None of the above. Answer: D 32. We often observe intra-industry North-South trade in "computers and related devices." This 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 33. We often observe "pseudo-intra-industry trade" between the United States and Mexico. Actually, such trade is consistent with A. oligopolistic markets. B. comparative advantage associated with Heckscher-Ohlin model. C. optimal tariff issues. D. huge sucking sound. E. None of the above. Answer: B 34. Intra-industry trade will tend to dominate trade flows when which of the following exists? A. Large differences between relative country factor availabilities B. Small differences between relative country factor availabilities C. Homogeneous products that cannot be differentiated D. Constant cost industries E. None of the above. Answer: B 35. The most common form of price discrimination in international trade is A. non-tariff barriers. B. Voluntary Export Restraints. C. dumping. D. preferential trade arrangements. E. None of the above.
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Answer: C
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Essay Questions 1. Why is it that an industry is operating under conditions of domestic internal scale economies (applies to firm in the country) - then the resultant equilibrium 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. 2. Is it possible that if positive scale economies characterize an industry, that its equilibrium may be consistent with purely competitive conditions ? Explain how this could happen. Answer: Yes. If the scale economies were external to the firm, then there is no reason why the firms may not be in perfect competition. 3. If a scale economy is the dominant technological factor defining or establishing comparative advantage, then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance, or historical accident. Explain, and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage. Answer: This 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. It may have no connection to any supply or demand related factors; nor to any natural or man-made availability. This is all exactly the opposite of the Heckscher-Ohlin Neo-Classical model's explanation of the determinants of comparative advantage. 4. It 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: One answer is that the terms of trade effects may dominate any other factors. 5. If scale economies were not only external to firms, but were also external to individual countries. That is, the larger the worldwide industry (regardless of where firms or plants are located), the cheaper would be the per-unit cost of production. Describe what world trade would look like in this case. Answer: Presumably each country would specialize in some component of the final product. This would result in much observed intra-industry trade.
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Quantitative/Graphing Problems
1. The figure above represents the demand and cost functions facing a Brazilian Steel producing monopolist. If it were unable to export, and was constrained by its domestic market, what quantity would it sell at what price? Answer: It would sell 5 (million tons) at a price of $8/ton. 2. Now the monopolist discovers that it can export as much as it likes of its steel at the world price of $5/ton. It will therefore expand for- export production up to the point where its marginal cost equals $5. How much steel will the monopolist sell, and at what price? Answer: It would sell 10 million tons at $5/ton. 3. Given the opportunity to sell at world prices, the marginal (opportunity) cost of selling a ton domestically is what? Answer: $5/ton. 4. While selling exports it would also maximize its domestic sales by equating its marginal (opportunity) cost to its marginal revenue of $5. How much steel would the firm sell domestically, and at what price? Answer: 4 million tons at $10/ton.
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5. The Brazilian firm is charging its foreign (U.S.) customers one half the price it is charging its domestic customers. Is this good or bad for the real income or economic welfare of the United States? Is the Brazilian firm engaged in dumping? Is this predatory behavior on the part of the Brazilian steel company? Answers: Good. Yes, 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 market shares, but rather is "mere" static profit maximization behavior, as is expected of any self-respecting monopolist.
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