Chapter 6 Economies of Scale, Imperfect Competition, and International Trade
6.1 Economies of Scale and International Trade: An Overview
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
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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
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3) 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
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4) 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
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5) 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
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6) 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
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7) Why is it that if an industry were 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.
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8) 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.
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9) Why are increasing returns to scale and fixed costs important in models of international trade and
monopolistic competition?
Answer: There are many answers. Three of these are
(a)
Increasing returns to scale, and high fixed costs may be inconsistent with perfect competition.
In such a case, the initial autarkic state may be a suboptimal equilibrium. For example, relative prices
may not equal marginal rates of transformation. It follows from this that a change in output
compositions associated with trade may result in a national welfare for one or both trading countries
that is inferior to that associated with the initial autarkic conditions. Hence no "gains from trade."
(b)
In a case of increasing scale economies at the firm or plant level, the determination of which
product will be exported by which country is ex-ante indeterminate. Therefore, deriving clear
implications concerning the effects of trade on income distributions such as may be derived from the
Samuelson-Stolper Theorem is no longer generally possible.
(c)
Market structures containing positive scale economies and imperfect competition may allow
for "two-way trade," or intra-industry trade. As in b. above, the various theorems derivable from the
Heckscher-Ohlin model concerning directions of trade and income distributions are no longer
generally applicable.
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6.2 Economies of Scale and Market Structure
1) 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
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2) 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
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3) 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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4) 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
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5) 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.
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6.3 The Theory of Imperfect Competition
1) 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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2) 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
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3) 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
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4) 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
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5) 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
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6) 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
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7) 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
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8) 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.
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6.4 Monopolistic Competition and Trade
1) 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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2) International trade based on scale economies is likely to be associated with
A) Ricardian comparative advantage.
B) comparative advantage associated with Heckscher-Ohlin factor-proportions.
C) comparative advantage based on quality and service.
D) comparative advantage based on diminishing returns.
E) None of the above.
Answer: E
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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) 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
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4) 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
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5) 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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6) 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
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7) 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
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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 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
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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) 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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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 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
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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) monopolistic competition.
B) inter-industry trade.
C) intra-industry trade.
D) Heckscher-Ohlin trade.
E) None of the above.
Answer: B
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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) 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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13) 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
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14) 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
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15) Trade without serious income distribution effects, then, is most likely to happen
A) in simple manufactures trade between developing countries.
B) in sophisticated manufactures trade between rich and poor countries.
C) in sophisticated manufactures trade between rich countries.
D) in agricultural trade between rich countries.
E) None of the above.
Answer: C
Question Status: New
16) 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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17) Refer to above figure. 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.
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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.
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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.
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6.5 Dumping
1) 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.
Answer: C
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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) None of the above.
Answer: A
Question Status: New
3) Complaints are often made to the International Trade Commission concerning foreign "dumping" practices.
These complaints typically claim that
A) foreign companies are charging exorbitant prices that are higher than the true value of the products.
B) foreign companies are charging prices that are lower than prices they charge countries other than the
U.S.
C) U.S. consumers are harmed by the lack of quality control or health concerns in foreign countries.
D) U.S. firms are harmed by the unfair pricing of foreign exporters.
E) None of the above.
Answer: D
Question Status: New
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.
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5) Refer to above figure. 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: 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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6.6 The Theory of External Economies
1) There are no questions for this section.
Answer: TRUE
Question Status: New
6.7 External Economies and International Trade
1) Explain why it may be argued that the relative importance of the intra-industry component of world trade is
likely to lessen economic strife or confrontation (a la Stolper-Samuelson) associated with commercial policy
within countries in which overall trade is expanding?
Answer: In the case of the Neo-Classical H-O model, the expansion of trade will tend to increase the incomes of
those factors in which the exports are relatively intense. This may create situations in which unskilled
labor's already relatively low relative incomes would worsen in a country such as the U.S., hence
heating up "class warfare." In the case of intra-industry trade, the expanding exports will tend to be in
relatively fragmented subsets of products ("brands"). Such export expansion will have no determinant
or systematic tendency to affect relative factor returns in any deterministic manner.
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2) Explain why positive economies of scale in one (of two) sectors may establish a comparative advantage for
the large (as compared to the small) country in the production of the commodity which exhibits positive
scale economies.
Answer: In the case of the H-O model, the actual size of the country is irrelevant in the determination of the
direction of trade (though it may affect the equilibrium terms of trade). When positive scale economies
apply to the production of one product, the country that can devote more resources (in absolute terms)
will be able to sell that product cheaper, and therefore will be more likely to gain a "revealed"
comparative advantage in that product. This will be the country with more factors (both labor and
capital)-the larger country.
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3) The following table describes the labor-input coefficients needed to produce one Widget in England and
Portugal. Both countries are identical in size, tastes, technology. This technology is described in the table
below:
Let us assume that each country has 10 labor-hours available. Further, consumers always consume an equal
amount of apples and widgets.
(a)
How of each product will be produced in England under autarky? 2 widgets and 2 apples.
(b)
Judging from autarky conditions, which country has a comparative advantage in widgets?
(c)
If England (completely) specialized in widgets, how many widgets would be produced, and how
many apples?
(d)
If the world terms of trade were established at 3.5 widgets = 3.5 Apples, which country would enjoy
gains from trade (as compared to The autarky solution?)
(e)
If Portugal were to completely specialize in widgets, how would the answers to c and d change?
(f)
What would the production possibility curve look like in each country?
Answer: (a)
2 widgets and 2 apples
(b)
None
(c)
7 widgets in England and 7 apples in Portugal
(d)
Both would gain from trade. Instead of consuming 2 widgets and 2 apples, they would each
consume 3.5 widgets and 3.5 apples.
(e)
Same numbers as c, except that the countries will each be assigned a different product. Exactly
the same answer for d.
(f)
Convex to the origin.
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6.8 Economic Geography and Interregional Trade
1) There are no questions for this section.
Answer: TRUE
Question Status: New
6.9 Appendix to Chapter 6: Determining Marginal Revenue
1) There are no questions for this section.
Answer: TRUE
Question Status: New
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