Lesson 7

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International Economics, 10e (Krugman/Obstfeld/Melitz)
Chapter 8 Firms in the Global Economy: Export Decisions, Outsourcing, and
Multinational Enterprises
8.1 The Theory of Imperfect Competition
1) A monopolistic firm
A) will never sell a product whose demand is inelastic at the quantity sold.
B) can sell as much as it wants for any price it determines in the market.
C) cannot determine the price, which is determined by consumer demand.
D) cannot sell additional quantity unless it raises the price on each unit.
E) will always earn a profit in the long run.
Answer: A
Page Ref: 166-168
Difficulty: Easy
2) Monopolistic competition is associated with
A) product differentiation.
B) price-taking behavior.
C) explicit consideration at the firm level of the strategic impact of other firms' pricing decisions.
D) high profit margins in the long run.
E) increasing returns to scale.
Answer: A
Page Ref: 169-173
Difficulty: Easy
3) Modeling trade in imperfectly competitive industries is problematic because
A) there is no single generally accepted model of behavior by imperfectly competitive firms.
B) there are no models of imperfectly competitive behavior.
C) it is difficult to find an imperfectly competitive firm in the real world.
D) collusion among imperfectly competitive firms makes usable data rare.
E) there is only a single model of imperfect competition (monopoly) but imperfect competition
can take many forms in the real world.
Answer: A
Page Ref: 165-166
Difficulty: Easy
4) The simultaneous export and import of widgets by the United States is an example of
A) intra-industry trade.
B) increasing returns to scale.
C) imperfect competition.
D) inter-industry trade.
E) the effect of a monopoly on international trade.
Answer: A
Page Ref: 177-178
Difficulty: Easy
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5) When a country both exports and imports a type of commodity, the country is engaged in
A) intra-industry trade.
B) increasing returns to scale.
C) imperfect competition.
D) inter-industry trade.
E) an attempt to monopolize the relevant industry.
Answer: A
Page Ref: 177-178
Difficulty: Easy
6) If there are a large number of firms in a monopolistically competitive industry
A) long-run profit will be equal to zero.
B) the country in which the firms are located can be expected to export the goods they produce.
C) there will be barriers to entry that prevent addition firms from entering the industry.
D) the firms will converge production on a standardized product.
E) there will be a small number of firms that are very large and the rest will be very small.
Answer: A
Page Ref: 170-172
Difficulty: Easy
7) 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.
Page Ref: 177-178
Difficulty: Easy
8) If a firm increases its output in the ________ and unit costs ________, then the firm is
experiencing ________ of scale.
A) long-run; decrease; economies
B) short-run; decrease; economies
C) long-run; decrease; diseconomies
D) short-run; decrease; diseconomies
E) long-run; increase; economies
Answer: A
Page Ref: 177-178
Difficulty: Easy
9) If a firm increases its output in the ________ and unit costs ________, then the firm is
experiencing ________ of scale.
A) long-run; increase; diseconomies
B) short-run; decrease; economies
C) long-run; decrease; diseconomies
D) short-run; decrease; diseconomies
E) long-run; increase; economies
Answer: A
Page Ref: 177-178
Difficulty: Easy
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10) If a firm that uses a production process that yields economies of scale charges a price equal
to ________, then profit will be ________.
A) marginal cost; negative
B) marginal revenue; maximized
C) marginal cost; maximized
D) marginal revenue; positive
E) marginal cost; positive
Answer: A
Page Ref: 177-178
Difficulty: Moderate
11) Firms that produce ________ products must be ________ competitive.
A) differentiated; imperfectly
B) differentiated; perfectly
C) standardized; imperfectly
D) standardized; perfectly
E) exported; imperfectly
Answer: A
Page Ref: 177-178
Difficulty: Moderate
12) Imperfectly competitive firms have a demand curve that ________ and a marginal revenue
curve that ________ and is ________ the demand curve.
A) slopes downward; slopes downward; below
B) is horizontal; is horizontal; the same as
C) slopes downward; is horizontal; above
D) is horizontal; slopes downward; below
E) slopes downward; slopes downward; the same as
Answer: A
Page Ref: 177-178
Difficulty: Easy
13) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P. What is
marginal revenue equal to when P = 30?
Answer: Q = 40, so MR = 30 - (40/2) = 10.
Page Ref: 167
Difficulty: Moderate
14) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P. What is
marginal revenue equal to when P = 40?
Answer: Q = 20, so MR = 40 - (20/2) = 30.
Page Ref: 167
Difficulty: Moderate
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15) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is
marginal cost equal to when Q = 10?
Answer: MC = 4 for any Q
Page Ref: 167
Difficulty: Moderate
16) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is
total cost equal to when Q = 10?
Answer: C = 100 + (4)(10) = 140
Page Ref: 167
Difficulty: Moderate
17) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is
average total cost equal to when Q = 10?
Answer: C/Q = [100 + (4)(10)]/10 = 14
Page Ref: 167
Difficulty: Moderate
18) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is
average fixed cost equal to when Q = 10?
Answer: F/Q = 100/10 = 10
Page Ref: 167
Difficulty: Moderate
19) Under oligopoly, firms' pricing policies are ________ and, under monopolistic competition,
they are ________.
A) interdependent; independent
B) independent; interdependent
C) cooperative; uncooperative
D) uncooperative; cooperative
E) profit maximizing; revenue maximizing
Answer: A
Page Ref: 168-172
Difficulty: Moderate
20) Under the model of monopolistic competition, a(an) ________ in the number of firms in the
industry will cause ________ to ________.
A) increase; average price; decrease
B) increase; average price; increase
C) increase; average cost; decrease
D) decrease; markup; decrease
E) increase; marginal cost; decrease
Answer: A
Page Ref: 168-172
Difficulty: Moderate
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21) Under the model of monopolistic competition, a(an) ________ in the number of firms in the
industry will cause ________ to ________.
A) increase; markup; decrease
B) increase; average price; increase
C) increase; average cost; decrease
D) decrease; markup; decrease
E) increase; marginal cost; decrease
Answer: A
Page Ref: 168-172
Difficulty: Moderate
8.2 Monopolistic Competition and Trade
1) Intra-industry trade is most common in the trade patterns of
A) the industrial countries of Western Europe.
B) the developing countries of Asia and Africa.
C) raw material producers.
D) China with the rest of the world.
E) labor-intensive products.
Answer: A
Page Ref: 179
Difficulty: Easy
2) If the market for products produced by firms in a monopolistically competitive industry
becomes ________, then there will be ________ firms and each firm will produce ________
output and charge a ________ price.
A) larger; more; more; lower
B) larger; fewer; more; lower
C) larger; fewer; more; higher
D) larger; more; more; higher
E) larger; more; less; higher
Answer: A
Page Ref: 173-175
Difficulty: Easy
3) 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) a relatively small number of price competing firms.
C) a relatively small number of imperfect competitors.
D) monopolists in each country.
E) a large number of oligopolists in each country.
Answer: A
Page Ref: 173-178
Difficulty: Easy
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4) International trade based solely on internal scale economies in both countries is likely to be
carried out by
A) monopolists in each country.
B) a relatively large number of price competing firms.
C) a relatively small number of price competing firms.
D) a relatively small number of imperfect competitors.
E) a large number of oligopolists in each country.
Answer: A
Page Ref: 173-178
Difficulty: Easy
5) A monopoly firm engaged in international trade will
A) equate marginal costs with marginal revenues in both domestic and foreign markets.
B) equate average to local costs.
C) equate marginal costs with foreign marginal revenues.
D) equate marginal costs with the highest price the market will bear.
E) equate marginal costs with the relative world prices.
Answer: A
Page Ref: 173-178
Difficulty: Easy
6) A monopoly firm will maximize profits by producing where
A) marginal revenue is the same in domestic and foreign markets.
B) prices are the same in domestic and foreign markets.
C) marginal revenue is higher in foreign markets.
D) marginal revenue is higher in the domestic market.
E) total revenue from domestic and foreign sales is maximized.
Answer: A
Page Ref: 173-178
Difficulty: Moderate
7) A firm in long-run equilibrium under monopolistic competition will earn
A) zero economic profits because of free entry.
B) positive monopoly profits because each sells a differentiated product.
C) positive oligopoly profits because each firm sells a differentiated product.
D) negative economic profits because it has economies of scale.
E) positive economic profit if it engages in international trade.
Answer: A
Page Ref: 173-178
Difficulty: Easy
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8) 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 have more varieties and lower prices.
B) consumers in both countries would have higher prices and fewer varieties.
C) consumers in the importing country only would have higher prices and fewer varieties.
D) consumers in the exporting country only would have higher prices and fewer varieties.
E) consumers in both countries would have fewer varieties at lower prices.
Answer: A
Page Ref: 173-178
Difficulty: Easy
9) 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) the two countries must engage in international trade with each other.
B) each country's marginal cost must equal that of the other country.
C) the marginal cost of this industry must equal marginal revenue in the other.
D) the monopoly must lower prices in order to sell more.
E) they must combine to become a multinational corporation.
Answer: A
Page Ref: 173-178
Difficulty: Moderate
10) 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 with each other,
then we would expect
A) each country will export different varieties of the product to the other.
B) the country in which the price of the product is lower will export the product.
C) the country with a relative abundance of the factor of production in which production of the
product is intensive will export this product.
D) neither country will export this product since there is no comparative advantage.
E) the countries will trade only with other nations they are not in competition with.
Answer: A
Page Ref: 173-178
Difficulty: Easy
11) Two countries engaged in trade in products with no scale economies, produced under
conditions of perfect competition, are likely to be engaged in
A) inter-industry trade.
B) monopolistic competition.
C) intra-industry trade.
D) Heckscher-Ohlin trade.
E) oligopolistic competition
Answer: A
Page Ref: 173-178
Difficulty: Easy
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12) Two countries engaged in trade in products with scale economies, produced under conditions
of monopolistic competition, are likely to be engaged in
A) intra-industry trade.
B) price competition.
C) inter-industry trade.
D) Heckscher-Ohlinean trade.
E) immiserizing trade.
Answer: A
Page Ref: 173-178
Difficulty: Easy
13) We often observe "pseudo-intra-industry trade" between the United States and Mexico.
Actually, such trade is consistent with
A) comparative advantage associated with Heckscher-Ohlin model.
B) oligopolistic markets.
C) optimal tariff issues.
D) the Ricardian model of trade.
E) the specific factors model of trade.
Answer: A
Page Ref: 173-178
Difficulty: Easy
14) Intra-industry trade will tend to dominate trade flows when which of the following exists?
A) small differences between relative country factor availabilities
B) large differences between relative country factor availabilities
C) homogeneous products that cannot be differentiated
D) constant cost industries
E) uneven distribution of abundant resources between two countries
Answer: A
Page Ref: 173-178
Difficulty: Easy
15) Trade without serious income distribution effects is most likely to happen
A) in sophisticated manufactures trade between rich countries.
B) in simple manufactures trade between developing countries.
C) in sophisticated manufactures trade between rich and poor countries.
D) in agricultural trade between rich countries.
E) in labor-intensive industries like clothing.
Answer: A
Page Ref: 173-178
Difficulty: Moderate
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16) Imagine 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 in a high volume of intra-industry trade.
Page Ref: 173-178
Difficulty: Difficult
17) Refer to above figure. The monopolist can export as much as it likes of its steel at the world
price of $5/ton. How much steel will the monopolist sell, and at what price?
Answer: It would sell 10 million tons at $5/ton.
Page Ref: 173-178
Difficulty: Moderate
18) Refer to above figure. Given the opportunity to sell at world prices, the marginal
(opportunity) cost of selling a ton domestically is what?
Answer: $5/ton.
Page Ref: 173-178
Difficulty: Easy
19) Refer to above figure. 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.
Page Ref: 173-178
Difficulty: Easy
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20) If the market for products produced by firms in a monopolistically competitive industry
becomes ________, then there will be ________ firms and each firm will produce ________
output and charge a ________ price.
A) smaller; fewer; less; higher
B) smaller; more; less; higher
C) smaller; more; less; lower
D) smaller; fewer; less; lower
E) smaller; fewer; more; higher
Answer: A
Page Ref: 173-178
Difficulty: Easy
21) In an industry where firms experience internal scale economies, the long-run cost of
production will depend on
A) the size of the market.
B) the size of the labor force.
C) whether the country engages in intra-industry trade.
D) individual firms' fixed costs.
E) whether the country engages in inter-industry trade.
Answer: A
Page Ref: 177-178
Difficulty: Easy
8.3 Firm Responses to Trade: Winners, Losers, and Industry Performance
1) In the model of monopolistic competition, if firms have ________ average cost curves, then
opening trade will ________ the total number of firms and ________ the average price.
A) downward sloping; decrease; decrease
B) downward sloping; decrease; increase
C) downward sloping; increase; decrease
D) upward sloping; decrease; increase
E) upward sloping; increase; decrease
Answer: A
Page Ref: 181-185
Difficulty: Moderate
2) In the model of monopolistic competition, if firms have ________ average cost curves, then
opening trade will cause ________ firms to ________ the industry.
A) different; less efficient; exit
B) different; more efficient; enter
C) symmetric; less efficient; exit
D) symmetric; more efficient; enter
E) symmetric; less efficient; enter
Answer: A
Page Ref: 181-185
Difficulty: Easy
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3) In the model of monopolistic competition, compared to a firm with a higher marginal cost, a
firm with a lower marginal cost will set a ________ price, produce ________ output, and earn
________ profits.
A) lower; more; more
B) higher; more; more
C) lower; less; less
D) higher; less; less
E) higher; less; more
Answer: A
Page Ref: 181-185
Difficulty: Easy
4) In the model of monopolistic competition, compared to a firm with a lower marginal cost, a
firm with a higher marginal cost will set a ________ price, produce ________ output, and earn
________ profits.
A) higher; less; less
B) lower; more; more
C) higher; more; more
D) lower; less; less
E) higher; less; more
Answer: A
Page Ref: 181-185
Difficulty: Easy
5) In the model of monopolistic competition, an increase in industry output will cause individual
firms' demand curves to become ________, which will ________ demand for higher-priced
goods and ________ demand for lower-priced goods.
A) flatter; reduce; increase
B) steeper; reduce; increase
C) flatter; increase; reduce
D) steeper; increase; reduce
E) horizontal; reduce; reduce
Answer: A
Page Ref: 181-185
Difficulty: Easy
6) In the model of monopolistic competition, an increase in industry output will ________
producers of ________ higher-priced goods and ________ producers of lower-priced goods.
A) harm; benefit
B) benefit; harm
C) harm; harm
D) benefit; benefit
E) benefit; have no effect on
Answer: A
Page Ref: 181-185
Difficulty: Easy
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7) In the model of monopolistic competition, an increase in industry output will ________
market shares and ________ profits of producers of higher-priced goods and will ________
market shares and ________ profits of producers of lower-priced goods.
A) reduce; reduce; increase; increase
B) increase; increase; reduce; reduce
C) increase; reduce; increase; reduce
D) reduce; increase; reduce; increase
E) reduce; increase; increase; reduce
Answer: A
Page Ref: 181-185
Difficulty: Easy
8.4 Trade Costs and Export Decisions
1) In the model of monopolistic competition, trade costs between countries will cause domestic
and foreign markets to have ________ prices, ________ quantities sold, and ________ profit
levels.
A) different; different; different
B) identical; different; different
C) different; different; identical
D) identical; different; identical
E) identical; identical; different
Answer: A
Page Ref: 185-187
Difficulty: Easy
2) In the model of monopolistic competition, trade costs between countries cause
A) marginal costs of exported goods to exceed the marginal costs of goods sold domestically.
B) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
C) all firms that can earn a profit on domestic sales to export their goods at lower prices.
D) all firms that can earn a profit on domestic sales to export their goods at higher prices.
E) countries to negotiate the elimination of trade costs by mutual subsidization of trade.
Answer: A
Page Ref: 185-187
Difficulty: Easy
3) In the model of monopolistic competition, trade costs between countries cause
A) some firms that can earn a profit on domestic sales to refrain from exporting their goods.
B) prices of goods sold domestically to exceed the prices of exported goods.
C) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
D) all firms that can earn a profit on domestic sales to export their goods at higher prices.
E) countries to negotiate the elimination of trade costs by mutual subsidization of trade.
Answer: A
Page Ref: 185-187
Difficulty: Easy
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8.5 Dumping
1) The most common form of price discrimination in international trade is
A) dumping.
B) non-tariff barriers.
C) Voluntary Export Restraints.
D) preferential trade arrangements.
E) product boycotts.
Answer: A
Page Ref: 188-190
Difficulty: Easy
2) If an industry is imperfectly competitive, and markets are segmented then
A) a firm may find that it is profitable to engage in dumping.
B) a firm may find that international trade is unprofitable.
C) a firm may find that it should promote scale economies.
D) a firm may find that it has lost its comparative advantage.
E) a firm may find that it should become more specialized.
Answer: A
Page Ref: 188-190
Difficulty: Easy
3) Complaints are often made to the International Trade Commission concerning foreign
"dumping" practices. These complaints typically claim that
A) U.S. firms are harmed by the unfair pricing of foreign exporters.
B) foreign companies are charging exorbitant prices that are higher than the true value of the
products.
C) foreign companies are charging prices that are lower than prices they charge countries other
than the U.S.
D) U.S. consumers are harmed by the lack of quality control or health concerns in foreign
countries.
E) U.S. consumers cannot differentiate between the foreign and domestic goods.
Answer: A
Page Ref: 188-190
Difficulty: Easy
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4) 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.
Page Ref: 188-190
Difficulty: Moderate
5) The figure above represents the demand and cost functions facing a Brazilian Steel producing
monopolist. 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?
Answer: It is good for U.S. customers.Yes, this is dumping if you define dumping as selling
abroad at a price lower than domestically. No, it is not dumping if by dumping you mean selling
below marginal cost. No, this is not predatory, since it is not being done in order to capture
market share, but rather is "mere" static profit maximization behavior, as is expected of any selfrespecting monopolist.
Page Ref: 188-190
Difficulty: Moderate
8.6 Multinationals and Outsourcing
1) A corporation is considered a multinational ________ if ________.
A) parent; it owns more than 10% of a foreign firm
B) parent; more than 10% of its stock is held by a foreign company
C) child; more than 10% of its stock is held by a foreign company
D) child; more than 50% of its stock is held by a foreign company
E) monopolist; it owns more than 50% of a foreign firm
Answer: A
Page Ref: 190-194
Difficulty: Easy
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2) A corporation is considered a multinational ________ if ________.
A) affiliate; more than 10% of its stock is held by a foreign company
B) parent; more than 10% of its stock is held by a foreign company
C) child; more than 10% of its stock is held by a foreign company
D) child; more than 50% of its stock is held by a foreign company
E) monopolist; it owns more than 50% of a foreign firm
Answer: A
Page Ref: 190-194
Difficulty: Easy
3) Consider the following two cases. In the first, a U.S. firm purchases 18% of a foreign firm. In
the second, a U.S. firm builds a new production facility in a foreign country. Both are ________,
with the first referred to as ________ and the second as ________.
A) foreign direct investment (FDI) outflows; greenfield; brownfield
B) foreign direct investment (FDI) inflows; greenfield; brownfield
C) foreign direct investment (FDI) outflows; brownfield; greenfield
D) foreign direct investment (FDI) inflows; brownfield; greenfield
E) foreign direct investment (FDI); inflows; outflows
Answer: A
Page Ref: 190-194
Difficulty: Moderate
4) When a multinational affiliate replicates production in a foreign country it is called ________
foreign direct investment.
A) horizontal
B) vertical
C) transitional
D) bisectional
E) direct
Answer: A
Page Ref: 190-194
Difficulty: Easy
5) When a multinational affiliate replicates elements of a production process in a foreign country
it is called ________ foreign direct investment.
A) vertical
B) horizontal
C) transitional
D) bisectional
E) direct
Answer: A
Page Ref: 190-194
Difficulty: Easy
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6) What is the nature of the proximity-concentration tradeoff that firms have to deal with then
making decisions regarding foreign direct investment?
Answer: If the firm has numerous production facilities close to their various international
markets, trade costs will be relatively low. However, when there are numerous production
facilities, each will be relatively small, and opportunities for economies of scale will be
foregone.
Page Ref: 190-194
Difficulty: Moderate
7) Foreign outsourcing is
A) the transfer of operations to foreign contractors.
B) an example of internalization.
C) an example of foreign direct investment.
D) currently illegal in the U.S.
E) the substitution of immigration for foreign direct investment.
Answer: A
Page Ref: 190-194
Difficulty: Moderate
8.7 The Firm's Decision Regarding Foreign Direct Investment
1) A firm is more likely to engage in horizontal foreign direct investment if
A) trade costs are high and there are internal economies of scale.
B) trade costs are low and there are internal economies of scale.
C) trade costs are high and there are external economies of scale.
D) trade costs are low and there are external economies of scale.
E) trade costs are low and firms experience constant returns to scale in production.
Answer: A
Page Ref: 194-197
Difficulty: Easy
2) A firm's foreign direct investment. decisions are, in the case of horizontal FDI, strongly
influenced by ________ and, in the case of vertical FDI, strongly influenced by ________.
A) trade costs; production costs
B) materials costs; labor costs
C) production costs; materials costs
D) production costs; trade costs
E) labor costs; trade costs
Answer: A
Page Ref: 194-197
Difficulty: Easy
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3) During the past decade, U.S. imports of business services have ________, U.S. exports of
business services have ________, and U.S. net exports of business services have ________.
A) increased; increased; increased
B) increased; decreased; decreased
C) decreased; increased; increased
D) increased; increased; not changed
E) decreased; decreased; increased
Answer: A
Page Ref: 197-199
Difficulty: Moderate
4) What are the consequences of outsourcing production on the welfare of countries?
Answer: By taking advantage of cost differentials between countries, both countries can enjoy
gains from trade. However, income distribution effects will result in winners and losers. Gains
from trade are therefore thought of in terms of net gains in which the winners could compensate
the losers and still be better off.
Page Ref: 199-200
Difficulty: Moderate
5) Product differentiation and internal economies of scale yield gains from trade in the form of
A) lower production costs and a greater variety of goods.
B) higher profits and lower trade costs.
C) the proximity-concentration effect.
D) a proliferation of competitive firms.
E) the substitution of immigration for foreign direct investment.
Answer: A
Page Ref: 199-200
Difficulty: Moderate
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