Econ 327 Exam 2

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From the list below, choose two examples of products that are traded on international markets for which there are dynamic increasing returns Biotechnology Mining and minerals Agriculture Clothing and apparel Aircraft design

Biotechnology Aircraft design

Evaluating the relative importance of economies of scale and comparative advantage in causing the following. Specifically, for each outcome, state whether it was primarily the result of comparative advantage or economies of scale. Most of the world's aluminum is smelted in the Norway or Canada Half of the world's large jet aircraft are assembled in Seattle Most semiconductors are manufactured in either the United States of Japan Most Scotch whiskey comes from Scotland Much of the world's best wine comes from France

Economies of scale Economies of scale Economies of scale Comparative advantage Comparative advantage

Fore each of the following examples, explain whether this is a case of external or internal economies of scale: A number of firms doing contract research for the drug industry are concentrated in southeastern South Carolina All Hondas produced in the United States comes from plains in Ohio, Indiana or Alabama All airframes for Airbus, Europe's only producer of large aircraft are assembled in Toulouse, France Cranbury, New Jersey, in the artificial flavor capital of the the United States

External Internal Internal External

Explain the analogy between international borrowing and lending and ordinary international trade. The analysis of inter temporal trade follows directly the analysis of trade of two goods. Instead of two goods, you have ___________________________________. The relative price of future consumption is __________. Present consumption is relatively cheap in the country that has relatively _______ interest rates. This country will "export" present consumption (i.e. lend) to countries in which present consumption is relatively dear. The equilibrium real interest rate after borrowing and lending occur lies between that found in each country before borrowing and lending take place. Gains from borrowing and lending are analogous to gains from trade-there is ___________ efficiency in the production of goods inter temporally

Present consumption and future consumption 1/(1+r) low greater

Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished automobile. Because more firms, or specifically P = 17,000 + (150/n), where n represents the number of firms in a market. Assume that the initial size of the U.S. and the European automobile markets are 300 million and 533 million people, respectively. a. Calculate the equilibrium number of firms in the U.S. and European automobile markets without trade. In the U.S., there will be _____ firms. In Europe, there will be ____. b. What is the equilibrium price of automobiles in the United States and Europe if the automobile industry is closed to foreign trade? The equilibrium price in the U.S. is ______. The equilibrium price in Europe is $ _______. c. Now suppose that the United States decides on free trade in automobiles with Europe. The trade agreement with the Europeans adds 533 million consumers to the automobile market, in addition to the 300 million in the United States. How many automobile firms will there be in the United States and in Europe combined? What will be the new equilibrium price of automobiles? The combined number of firms will be _____. The equilibrium price will be $______. d. Prices fall in part (c) relative to part (b) because there are ______ firms in the combined markets than in each of the individual markets. Consumers are better off with trade not only because of lower prices but they now have ________________ to choose from.

a. 3, 4 b. 17050, 17037.50 c. 5, 17030 d. more, more variety

a. Country B's export subsidy would offset the terms of trade effect from Country A's export subsidy, which helps Country A and hurts Country B

Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Determine the impact on Japan's terms of trade of the following events. (Deteriorates terms of trade or Improves terms of trade) a. A war in the Middle East disrupts oil supply b. Korea develops the ability to produce automobiles that it cal sell in Canada and the United States c. U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants d. A harvest failure in Russia e. A reduction in Japan's tariffs on imported beef and citrus fruit

a. Deteriorates terms of trade b. Deteriorates terms of trade c. Improves terms of trade d. Deteriorates terms of trade e. Deteriorates terms of trade

External economies of scale a. are more likely to be associated with a perfectly competitive industry b. tend to result in large profits for each firm and an industry with relatively few firms c. cannot be associated with a perfectly competitive industry d. lead to the creation of a single large monopoly

a. are more likely to be associated with a perfectly competitive industry

A growing movement among economists to model phenomena such as interregional and international trade as well as the rise of cities as different aspects of the same phenomenon - economic interaction across space - is referred to as a. economic geography b. spatial economics c. physical geography d. interspatial analysis

a. economic geography

A monopolist engaged in international trade will a. equate marginal costs with marginal revenues in all markets b. equate regional to local costs c. equate marginal costs with the market-determined price d. equate marginal costs with foreign marginal revenues

a. equate marginal costs with marginal revenues in all markets

External economies of scale occur when average costs a. fall as the industry grows larger but rise as the representative firm grows larger b. remain constant c. rise as the industry grows larger d. fall as the representative firm and industry grows larger

a. fall as the industry grows larger but rise as the representative firm grows larger

The PP shows for a "typical" monopolistically competitive market, the relationship between product price and the number of firms. This curve is negatively sloped because a. more firms give rise to more intense competition, and hence a lower price b. product quality is "watered down" when there are many firms, thus necessitating a lower price c. a lower price attracts consumers, enabling more firms to enter the market. d. more firms can overpower and exploit workers, yielding low wages and consequently low prices

a. more firms give rise to more intense competition, and hence a lower price

Compared to a monopolistically competitive firm with a lower marginal cost, a firm with a higher marginal cost will a. produce less output b. earn higher profits c. set a lower price d. set the same price because the firm is a price taker

a. produce less output

Which of the following best describes a characteristic of vertical FDI? a. production cost difference are an outcome of the theory of comparative advantage b. dominated by flows between developed countries d. main reason for this type of FDI is to locate production near a firm's large customer bases

a. production cost difference are an outcome of the theory of comparative advantage

A "typical" monopolistically competitive market, the relationship between average cost and the number of firms. This curve is positively sloped because a. the more firms there, are the less each firm produces b. the marginal cost exceeds the average cost c. resource prices are "bid up" as the number of firms increases d. product quality is enhanced as the number of firms increases, causing average cost to rise

a. the more firms there, are the less each firm produces

What is a "forward-falling supply curve"? a. the supply curve of a perfectly competitive industry with external economies b. a supply curve describing reciprocal dumping c. the supply curve of a monopolistically competitive industry with internal economies d. the supply curve of a monopolistic engaged in dumping e. the supply curve of a perfectly competitive industry with internal economies

a. the supply curve of a perfectly competitive industry with external economies

Most firms in the apparel and footwear industries choose to outsource production to countries where labor is abundant (primarily, Southeast Asia and the Caribbean) but those firms do not integrate with their suppliers there. On the other hand, firms in many capital-intensive industries choose to integrate with their suppliers. What could be some differences between the labor-in intensive apparel and footwear industries on the one hand and capital-intensive industries on the other hand that would explain these choices? A multinational may prefer to a. use a foreign affiliate if it has a proprietary technology that it is concerned about losing, which is more likely to be the case in capital-intensive industries b. use a foreign affiliate if it wants to benefit from economies of scale as a result of the affiliate performing narrow parts of the production process for many different parent firms, which is more likely to be the case in capital-intensive industries c. outsource to an independent foreign firm if it is concerned about weak property rights in foreign countries which is more likely to be the case in labor-intensive industries d. outsourcing to an independent foreign if it doubts the ability of other firms to produce as efficiently as it could, which is more likely to be the case in labor-intensive industries

a. use a foreign affiliate if it has a proprietary technology that it is concerned about losing, which is more likely to be the case in capital-intensive industries

Recall the model with firm performance differences in a single integrated market discussed in the chapter. Now assume that a new technology becomes available. Any firm can adopt the new technology, but its use requires an additional fixed-cost investment. The benefit of the new technology is that it reduces a firm's marginal cost of production by a given amount. Could it be profit maximizing for some firms to adopt the new technology but not profit maximizing for other firms to adopt that same technology? Which firms would choose to adopt the new technology? How would they be different from the firms that choose not to adopt it? Assuming that if a firm invests in the technology, it will face a fixed cost T, but face a marginal cost cT which is lower than its marginal cost c without the technology, a. the gap c-cT will be smaller for a high marginal cost firm that for a low marginal cost firm. b. a firm with high marginal costs will need a lower level of output to justify the technology than a firm with low marginal costs c. it is possible that some firms (low cost firms) will choose to adopt the technology while others (high cost firms) do not. d. the technology is more likely to increase a firm's profits when the scale of production decreases

b. a firm with high marginal costs will need a lower level of output to justify the technology than a firm with low marginal costs

What factor primarily explains how a particular region develops the external economies that support an industry? a. shrewd political leadership b. accidents of history c. artful regional planning d. e presence of internal economies

b. accidents of history

The inverse relationship between market size and product prize occurs because: a. larger markets induce governments to intervene on behalf of consumers, bringing about price reductions b. an increase in market size allows each firm to produce more and thus have a lower average cost. The resulting economic profit entries new firms to enter, putting downward pressure on price. c. an increase in market size allows each firm to produce more, causing average costs to rise. Because their costs are higher, firms are forced to lower prices to avoid losing customers d. a bigger market requires more firms and more firms result in lower product quality and hence lower prices

b. an increase in market size allows each firm to produce more and thus have a lower average cost. The resulting economic profit entries new firms to enter, putting downward pressure on price.

b. higher in industries with a high degree of vertical FDI

How do economies of scale give rise to international trade? a. they enhance resource differences between countries b. international trade occurs because it increases the market size c. international trade occurs because economies of scale transfer knowledge across countries d. international trade occurs because of multi-national corporations

b. international trade occurs because it increases the market size

The provision of the export subsidy by Home on flowers, in the absence of Metzler's paradox, will have which of the following income distribution effects? a. it improves Home's terms of trade and aids its exporting sector as the internal relative price of flowers increases b. it worsens Home's terms of trade but aids its exporting sector as the internal relative price of flowers declines c. it worsens Home's terms of trade but aids its importing sector as the internal relative price of flowers increases d. it worsens Home's terms of trade and harms its exporting sector as the internal relative price of flowers declines

b. it worsens Home's terms of trade but aids its exporting sector as the internal relative price of flowers declines

Which of the following pairs of conditions must be met for dumping to occur? a. the industry must be imperfectly competitive and markets must be non-segmented b. the industry must be imperfectly competitive and markets must be segmented c. the industry must be perfectly competitive and markets must be segmented d. the industry must be imperfectly competitive and markets must have identical demand elasticities

b. the industry must be imperfectly competitive and markets must be segmented

Suppose that one country (Country A) subsidizes its exports and the other country (Country B) imposes a "countervailing" tariff that offsets its effect, so that in the end relative prices in the second country are unchanged. What happens to the terms of trade? What about welfare in the two countries? a. From country A's perspective, world relative supply will decrease and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses b. From Country A's perspective, world relative supply will decrease and world relative demand will increase. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A will definitely loses c. From Country A's perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses d. From Country A's perspective, world relative supply will increase and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so County A will definitely gain and Country B definitely loses

c. From Country A's perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses

Home and Foreign produce two goods, flowers and soybeans. Home exports the labor intensive flowers and Foreign exports the land intensive soybean. Suppose that Home provides an export subsidy to its domestic flower producers. The provision of an export subsidy to flower producers by Home will cause a. the relative demand for flowers to increase b. the relative supply of flowers to decrease c. an improvement in Foreign's terms of trade d. home's terms of trade to improve

c. an improvement in Foreign's terms of trade

The most common form of price discrimination found in international trade is a. non-tariff barriers b. bilateral trade arragements c. dumping d. import quotas

c. dumping

Home and Foreign produce two goods, flowers and soybeans. Home exports the labor intensive flowers and Foreign exports the land intensive soybeans. Suppose that Home places an import tariff on soybeans that if imports from Foreign. The imposition of the import tariff in soybeans by Home will cause a. no terms of trade effects on Home or Foreign b. home's welfare to improve as long as the import tariff imposed is "large" c. home's terms of trade to improve d. home's welfare to improve unambiguously

c. home's terms of trade to improve

The impact on the terms of trade of an import tariff depends on a. the number of units of the goods available b. how many countries produce the good c. how large a tariff imposing country is to the rest of the world d. how large of a tariff is placed on the good.

c. how large a tariff imposing country is to the rest of the world

The simultaneous export and import of textiles by India is an example of a. interindustry trade b. increasing returns to scale c. intraindustry trade d. imperfect competition

c. intraindustry trade

Why do internal economies of scale lead to imperfectly competitive industries? a. this is an observation based in measurable data b. there are barriers to entry due to large fixed costs c. large firms have cost advantages over small firms d. patent laws prevent firms from entering the market

c. large firms have cost advantages over small firms

Which of the following is not the reason for external economies of scale? a. specialized suppliers of intermediate goods b. labor market pooling c. large fixed costs d. knowledge spillovers

c. large fixed costs

When there are economies of scale, an increase in the size of the market will a. lead to fewer firms producing and selling in that market and raise the price per unit b. decrease the number of firms and leave the price per unit unchanged c. lead to more firms producing and selling in that market and lower the price per unit d. lead to more firms producing and selling in that market and raise the price per unit

c. lead to more firms producing and selling in that market and lower the price per unit

A decrease in the real interest rate will likely lead to a. an outward shift in the inter temporal production possibility frontier b. an inefficient use of resources available for present and future consumption c. less future consumption in favor of present consumption d. less present consumption in favor of future consumption

c. less future consumption in favor of present consumption

Internal economies of scale a. can never form the basis for international trade b. are associated only with high-tech or complex products such as robotics c. may be associated with an imperfectly competitive industry d. may be associated with a perfectly competitive industry

c. may be associated with an imperfectly competitive industry

Which of the following is true regarding the expansion in multinational production and outsourcing? a. policies that impede firms' abilities to relocate production accelerate the accumulation of long-run economy-wide gains b. the expansion is likely to induce income distribution effects that leave most people worse off. c. relocating production to take advantage of costs difference leads to overall gains from trade. d. some of the most visible effects of multinationals and outsourcing occur in the long run, as some firms expand employment while others reduce employment in response to increased globalization

c. relocating production to take advantage of costs difference leads to overall gains from trade.

Which of the following is true regarding the expansion in multinational production and outsourcing? a. policies that impede firms' abilities to relocate production accelerate the accumulation of long-run economy-wide gains b. the expansion is likely to induce income distribution effects that leave most people worse off c. some of the most visible effects of multinationals and outsourcing occur in the long run, as some firms expand employment while others reduce employment in response to increased globalization d. Relocating production to take advantage of cost difference leads to overall gains from trade

d. Relocating production to take advantage of cost difference leads to overall gains from trade

The imposition of the import tariff by Home on Foreign's soybeans, in the absence of Metzler's paradox, will have which of the following income distribution effects? The import tariff a. increases Home's internal relative price of flowers while benefiting the importing sector b. decreases Home's internal relative price of flowers while benefiting the exporting sector c. increases Home's internal relative price of flowers while benefiting the exporting sector d. decreases Home's internal relative price of flowers while benefiting the importing sector

d. decreases Home's internal relative price of flowers while benefiting the importing sector

Which of the following is NOT true? a. multinationals are an important part of international trade b. multinationals are an important part of international factor movement c. the main goal of multinationals is to control production abroad d. foreign-owned multinationals are less important in the U.S. than in the rest of the world

d. foreign-owned multinationals are less important in the U.S. than in the rest of the world

As a result of increased competition (higher number of firms n) in a monopolistically competitive industry a. the vertical intercept of the individual demand curve increases b. the individual demand curve becomes steeper c. overall productivity in the industry decreases d. high- cost firms contract and the highest - cost firms exit

d. high- cost firms contract and the highest - cost firms exit

It is fairly common for an industrial cluster to break up and for production to move to locations with lower wages when the technology of the industry is no longer rapidly improving - when it is no longer essential to have the absolutely most modern machinery, when the need for highly skilled workers has declined, and then being at the cutting edge of innovation conveys only a small advantage . Explain this tendency of industrial clusters to break up in terms of the theory of external economies. As technological change and innovation slows in a industry, a. knowledge spillovers will enable production to become efficient in low wage countries; thus, firms will seek out low cost production locations and the cluster will breakdown b. low wages countries will be able to reverse engineer products and produce them at a lower cost; thus, the cluster will lose its cost advantage and breakdown c. specialized suppliers and labor market pooling, which are the reasons clusters are more efficient than individual firms, become less important; thus firms will seek out low cost production locations and the cluster will breakdown d. specialized suppliers, labor market pooling, and knowledge spillovers, which are the reasons clusters are more efficient than individual firms, become less important; thus firms will seek out low cost production locations and the cluster will breakdown

d. specialized suppliers, labor market pooling, and knowledge spillovers, which are the reasons clusters are more efficient than individual firms, become less important; thus firms will seek out low cost production locations and the cluster will breakdown

A product is produced in a monopolistically competitive industry with economies of scale. 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 with lower production costs will export the product b. neither country will export this product since there is no comparative advantage c. the country with a relative abundance of factor inputs consistent with the factor intensity of the product will export this product d. that this trade will lead to greater product differentiation

d. that this trade will lead to greater product differentiation

According to the model of inter temporal trade, a country is most likely to borrow internationally if a. the returns on investment in this country are low b. this country is producing less than it can consume c. this country is producing more than it can consume d. the returns on investment in this country are high

d. the returns on investment in this country are high

Modeling trade industries composed of oligopolies is problematic because a. collusion and strategic behavior make usable data rare b. there are no empirically-valid models of oligopoly behavior c. it is difficult to develop a model of an oligopoly in the real world d. there are many competing models of oligopoly behavior

d. there are many competing models of oligopoly behavior

International trade based on scale economies is likely to be associated with a. comparative advantage associated with Heckscher-Ohlin factor-proportions b. absolute advantage due to resource abundance c. the law of diminishing returns d. Ricardian comparative advantage e. none of the above

e. none of the above

International trade based on scale economies is likely to be associated with a. the law of diminishing returns b. Ricardian comparative advantage c. comparative advantages associated with Heckscher-Ohlin factor-proportions d. absolute advantages due to resource abundance e. none of the above

e. none of the above

How would the number of firms competing in a particular market affect the likelihood that an exporter to that market would be accused of dumping? (Assume that the likelihood of a dumping accusation is related to the firm's price difference between its domestic price and its export price: the higher the price difference, the more likely the dumping accusation.) As the number of firms competing in a particular market increases, the price charged by exporters (and domestic firms) will ______, ______________ the probability that a dumping charge will be filed?

fall increasing

higher more

Product size and market size are _____ related

inversely

. Would a firm from a small country be more or less likely to be accused of dumping when it exports to a large country (relative to a firm from the large country exporting to the small country)? A firm exporting from a small country to a large country will be _________ likely to be accused of dumping than a firm exporting from a large country to a small country because it will experience a _________ difference between its domestic price and its export price since there will be ________ firms competing in the larger country.

more larger more

In our discussion of labor market pooling, we stressed the advantages of having two firms in the same location: If one firm is expanding while the other is contracting, it's to the advantage of both workers and firms that they be able to draw on a single labor pool. But it might happen that both firms want to expand or contract at the same time. Does this constitute and argument against geographical concentration? To answer this question, imagine that there are two companies that both use the same kind of specialized labor, say, two film studios that make use of experts in computer animation. Suppose that there are 550 workers with this special skill. Now compare two different scenarios: In scenario 1, both firms and all 500 workers are in the same city, and each firm is able to hire 275 workers. In scenario 2, the two firms, each with 275 workers, are in two different cities. Now suppose that both firms are expanding, increasing their demand for labor up to 305 each In the first scenario, each firm will face a local labor ________ of _______ workers

shortage 30

In our discussion of labor market pooling, we stressed the advantages of having two firms in the same location: If one firm is expanding while the other is contracting, it's to the advantage of both workers and firms that they be able to draw on a single labor pool. But it might happen that both firms want to expand or contract at the same time. Does this constitute and argument against geographical concentration? To answer this question, imagine that there are two companies that both use the same kind of specialized labor, say, two film studios that make use of experts in computer animation. Suppose that there are 550 workers with this special skill. Now compare two different scenarios: In scenario 1, both firms and all 500 workers are in the same city, and each firm is able to hire 275 workers. In scenario 2, the two firms, each with 275 workers, are in two different cities. Now suppose that both firms are expanding, increasing their demand for labor up to 305 each In the second scenario, each firm will face a local labor ___________ of __________ workers Thus locating next to each other ______________________________________ disadvantages over locating far apart when both firms are expanding

Econ 327 Exam 2

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