Econ 327 Test 2
In monopolistic competition, compared to a firm with higher marginal cost, a firm with lower marginal cost will set a ____ price, produce ____ output, and earn ____ profits.
lower; more; more
In the Heckscher-Ohlin model, countries are assumed to differ only in their
relative factor abundance.
If market size increases in the model of monopolistic competition, then the total number of firms will ____and the price of goods will ____.
rise; fall
The predictive power of the Heckscher-Ohlin model, at least in terms of forecasting the volume of trade, appears to undergo improvement upon abandonment of the assumption
that technologies are the same across countries.
When a small open economy imposes a tariff on imports, net welfare
always falls
With free trade in the Heckscher-Ohlin model,
both goods prices and factor prices are equalized across countries.
Suppose a large economy imposes a $5 tariff on a good. The world price of the good (excluding the tari")falls from $20 to $18. Imports fall from 100 units to 60 units. The terms-of-trade gain is ____ and the efficiency loss is ____. (Assume linear supply and demand curves.)
$120; $60
In the figure to the right, the importing country imposes a tariff that raises the domestic price from $88 to $1212 but lowers the foreign export price from $88 to $44. The net welfare gain from this tariff for the importing country is
$4
A decrease in the real interest rate will likely lead to A. Less future consumption in favor of present consumption. B. An outward shift in the intertemporal production possibility frontier. C. Less present consumption in favor of future consumption. D. An inefficient use of resources available for present and future consumption.
A
A monopolist engaged in international trade will A. equate marginal costs with marginal revenues in all markets. B. equate marginal costs with the market-determined price. C. equate regional to local costs. D. equate marginal costs with foreign marginal revenues.
A
Assume Home is a small country and that the import-competing production is controlled by one firm, a monopolist. If the government is truly concerned about reducing domestic monopoly power, it should use _______________ as an instrument of trade policy. A. a tariff B. an import quota C. a prohibitive tariff or an import quota D. an import quota or some other nontariff barrier to trade
A
How is an export subsidy by a large country different from an import quota by a large country? A. An export subsidy worsens terms of trade while an import quota improves them . B. They are not different. The effects on income distribution are the same. C. Unlike the welfare effects of an import quota, the welfare effects of an export subsidy are ambiguous. D. An export subsidy improves terms of trade while an import quota worsens them.
A
In perfect competition, firms set price equal to marginal cost. Why isn't this possible when there are internal economies of scale? Evaluate the following statement: If firms set their price equal to marginal cost, they would be operating at a loss. A. True. Given internal economies of scale, average cost is always greater than marginal cost. B. False. Given internal economies of scale, it is impossible to set price equal to marginal cost because it is zero.
A
The most common form of price discrimination found in international trade is A. dumping. B. bilateral trade arrangements. C. import quotas. D. non-tariff barriers.
A
Why do internal economies of scale lead to imperfectly competitive industries? A. Large firms have cost advantages over small firms. B. This is an observation based on measurable data. C. Patent laws prevent firms from entering the market. D. There are barriers to entry due to large fixed costs.
A
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 a relative abundance of factor inputs consistent with the factor intensity of the product will export this product. B. that this trade will lead to greater product differentiation. C. the country with lower production costs will export the product. D. neither country will export this product since there is no comparative advantage.
B
External economies of scale A. cannot be associated with a perfectly competitive industry. B. are more likely to be associated with a perfectly competitive industry. C. lead to the creation of a single large monopoly. D. tend to result in large profits for each firm and an industry with relatively few firms.
B
External economies of scale occur when average costs A. remain constant. B. fall as the industry grows larger but rise as the representative firm grows larger. C. rise as the industry grows larger. D. fall as the representative firm and industry grows larger.
B
Where there are economies of scale, the scale of production possible in a country is constrained by A. the size of the domestic market. B. the combined size of the domestic and foreign market. C. the aggregate size of all trading partner countries. D. the size of that country.
B
Which of the following is NOT true about the import demand curve? A. It is flatter than the domestic demand curve in the importing country. B. It is steeper than the domestic demand curve in the importing country. C. It slopes down. D. It intersects the vertical axis at the domestic equilibrium price in autarky equilibrium.
B
Which of the following is true regarding the expansion in multinational production and outsourcing? A. The expansion is likely to induce income distribution effects that leave most people worse off. B. Relocating production to take advantage of cost differences leads to overall gains from trade. 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. Policies that impede firms' abilities to relocate production accelerate the accumulation of long-run economy-wide gains.
B
Which of the following pairs of conditions must be met for dumping to occur? A. 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. C. The industry must be imperfectly competitive and markets must be non-segmented. D. The industry must be perfectly competitive and markets must be segmented.
B
An import tariff imposed by a large country affects income distribution in the following way: A. Consumers gain in the importing country and lose in the exporting country, while producers lose in the importing country and gain in the exporting country. B. An importing country as a whole unambiguously loses from the tariff. C. Consumers lose in the importing country and gain in the exporting country, while producers gain in the importing country and lose in the exporting country. D. Consumers and producers lose in the importing country and gain in the exporting country.
C
How do economies of scale give rise to international trade? A. International trade occurs because of multi-national corporations. B. International trade occurs because economies of scale transfer knowledge across countries. C. International trade occurs because it increases the market size. D. They enhance resource differences between countries.
C
Internal economies of scale A. are associated only with high-tech or complex products such as robotics. B. can never form the basis for international trade. C. may be associated with an imperfectly competitive industry. D. may be associated with a perfectly competitive industry.
C
What is a "forward-falling supply curve"? A. The supply curve of a perfectly competitive industry with internal economies. B. A supply curve describing reciprocal dumping. C. The supply curve of a perfectly competitive industry with external economies. D. The supply curve of a monopolistically competitive industry with internal economies. E. The supply curve of a monopolist engaged in dumping.
C
Which of the following best describes a characteristic of horizontal FDIhorizontal FDI? A. mainly driven by production cost differences between countriesmainly driven by production cost differences between countries B. behind the large increase in FDI inflows to developing countriesbehind the large increase in FDI inflows to developing countries C. substitute for this FDI is a parent licensing an independent firm to produce and sell its products in a foreign locationsubstitute for this FDI is a parent licensing an independent firm to produce and sell its products in a foreign location D. production cost differences are an outcome of the theory of comparative advantageproduction cost differences are an outcome of the theory of comparative advantage
C
Which of the following is NOT true? A. Multinationals are an important part of international factor movement. B. The main goal of multinationals is to control production abroad. C. Foreign-owned multinationals are less important in the U.S. than in the rest of the world. D. Multinationals are an important part of international trade.
C
Suppose Canada voluntarily limits the quantity of lumber it exports to the U.S. The quota rents would tend to be captured by
Canadian producers.
The figure to the right shows the market in an importing country after its government imposes a quota that restricts imports to (D^2 - S^2) (as a consequence) increases the domestic price from Pw to Pq. The following table lists five different areas in the figure, labeled A through E. A. area a B. area a + b + c + d C. area b + d D. area c E. area b + c + d To the effects given below, insert the area label (A, B, etc.) from the preceding table that gives the correct match.
Consumer loss = b Producer gain = a Quota rent = d
A firm will tend to become a multinational corporation if A. the per-unit cost of exporting exceeds the average variable cost of setting up an additional production facility. B. the per-unit cost of exporting is less than the average variable cost of setting up an additional production facility. C. the per-unit cost of exporting is less than the average fixed cost of setting up an additional production facility. D. the per-unit cost of exporting exceeds the average fixed cost of setting up an additional production facility.
D
According to the model of intertemporal trade, a country is most likely to borrow internationally if A. This country is producing less than it can consume. B. This country is producing more than it can consume. C. The returns on investment in this country are low. D. The returns on investment in this country are high.
D
As a result of increased competition (higher number of firms n) in a monopolistically competitive industry, A. high minus cost firms thrive and increase their profits and market shareshigh−cost firms thrive and increase their profits and market shares. B. overall productivity in the industry decreasesoverall productivity in the industry decreases. C. low minus cost firms contract and the lowest minus cost firms exitlow−cost firms contract and the lowest−cost firms exit. D. both winners and losers are generated among firms in an industryboth winners and losers are generated among firms in an industry.
D
A firm's decision to engage in vertical foreign direct investmentlong dash—to break up its production chain and move parts of that chain to a foreign affiliatelong dash—involves a trade-off between A. per-unit trade costs associated with exporting and average fixed costs of operating the foreign affiliate. B. per-unit production costs for the parts of the production chain that are being moved and average variable costs of operating the foreign affiliate. C. per-unit production costs for the parts of the production chain that are being moved and per-unit trade costs associated with exporting. D. per-unit production costs for the parts of the production chain that are being moved and average fixed costs of operating the foreign affiliate.
D
Internal economies of scale occur when the average costs A. fall for a given firm as the industry grows larger. B. rise for a given firm as the industry grows larger. C. rise as the representative firm grows larger. D. fall as the representative firm grows larger.
D
Suppose a large country imposes a tariff on imports. Then the world price of the good (excluding the tariff)____ and this represents ____ in the importing country's terms of trade.
decreases; an improvement
It is just as likely that economic growth will worsen a country's terms of trade as that it will improve them. Why, then, do most economists regard immiserizing growth, where growth actually hurts the growing country, as unlikely in practice? For immiserizing growth to occur A. strongly-import biased growth must be combined with very steep RS and RD curves. B. strongly-import biased growth must be combined with very flat RS and RD curves. C. strongly-export biased growth must be combined with very flat RS and RD curves. D. strongly-export biased growth must be combined with very steep RS and RD curves.
D
The creation of an integrated market as a result of international trade results in A. lower prices. B. more firms, each operating at a larger scale. C. a wider range of choices for consumers. D. All of the above.
D
What is the definition of a "small" country? A. A country that cannot function without international trade. B. A country in which export supply is larger than domestic supply. C. A country in which import demand is larger than domestic demand. D. A country that cannot affect its terms-of-trade.
D
Where there are economies of scale, an increase in the size of the market will A. decrease the number of firms and leave the price per unit unchanged. B. lead to fewer 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 raise the price per unit. D. lead to more firms producing and selling in that market and lower the price per unit.
D
Which of the following is NOT true about the export supply curve? A. It describes the excess of foreign supply over foreign demand. B. It intersects the vertical axis at the foreign equilibrium price in autarky equilibrium. C. It is flatter than the domestic supply curve in the exporting country. D. It is steeper than the domestic supply curve in the exporting country.
D
International trade based on scale economies is likely to be associated with A. Ricardian comparative advantage. B. absolute advantages due to resource abundance. C. the law of diminishing returns. D. comparative advantages associated with Heckscher-Ohlin factor-proportions. E. None of the above.
E
Suppose a country experiences an inflow of labor from the rest of the world but the world relative price remains the same. In that country, output of the capital-intensive good will ____ and output of the labor-intensive good will ____.
Fall, rise
Which of the following is NOT true about the VER?
It benefits the exporting country as a whole.
Which of the following is NOT true about the export supply curve?
It is steeper than the domestic supply curve in the exporting country.
Which is NOT a feature of a monopolistically competitive industry?
Pricing at marginal cost
Compared to a monopolistically competitive firm with a lower marginal cost, a firm with a higher marginal cost will
Produce less output
Which of the following is true regarding the expansion in multinational production and outsourcing?
Relocating production to take advantage of cost differences leads to overall gains from trade.
Which of the following best describes a characteristic of horizontal FDI?
Substitute for this FDI is a parent licensing an independent firm to produce and sell its products in a foreign location
Leontief found that the U.S. was a capital abundant country but that its exports were more labor-intensive than its imports. What is the best explanation for this?
The U.S. had higher labor productivity and was abundant in skilled workers.
What does the term "import demand" describe?
The excess of domestic demand over domestic supply.
Which of the following pairs of conditions must be met for dumping to occur?
The industry must be imperfectly competitive and markets must be segmented.
Monopolistic competition models help to explain the significant amount of intra-industry trade in theworld.
True
The table above shows the amounts of land and labor used, given current factor prices, to produce a unit of each of two goods. According to this data, the cigar industry currently uses a land-labor ratio equal to (a) while the land-labor ratio in soybeans is (b). (Enter your responses rounded to one decimal place.) Based on this data it is clear that soybeans are the (c) good.
a. .5 b. 2 c. land-intensive
The United States' imports from 1945 through 1970 were more capital-intensive than its exports. One would have expected that the United States would have imported more labor-intensive goods and exported capital-intensive goods during this period. This phenomenon that occurred in the United States is known as the: (a) During the time period 1945-1970 the U.S. exported more: (b)
a. Leontief paradox. b. technologically-intensive goods
Assume Home is a small country and that the import-competing production is controlled by one firm, a monopolist. Suppose Home imposes a tariff on foreign imports such that all imports are eliminated (a tariff this high is referred to as a prohibitive tariff). What price and quantity will the monopolist choose? The monopolist will produce (a) units of output at a price of $(b) per unit.
a. Q3 b. P3
According to the factor proportions model, a consequence of international trade is that factor prices across trading nations: (a) Suppose Home and Foreign only differ in their resources: Home has a higher ratio of labor to land than Foreign does. According to the factor proportions model, factor prices will become equalized because: (b)
a. become completely equalized. b. Home indirectly exports its labor and Foreign indirectly exports its land.
The production possibility frontiers for Home and Foreign are displayed together in the figure to the right. If candy is known to be the labor-intensive good, it can be deduced from the relative positions of the two PPFs that Foreign is the labor-abundant country. Because trade leads to a convergence of relative prices (the price of candy relative to sugar will be the same in Home and Foreign), the accompanying figure indicates that Foreign will always produce a (a) ratio of candy to sugar.
a. higher
The diagram to the right depicts pre-trade equilibria in Home (point 1) and Foreign (point 3). RD represents the relative demand for cigars in each country, while the respective relative cigar supply curves are RS for Home and RS* for Foreign. Assuming that soybeans are land-intensive and cigars are labor-intensive, it must be true, given that RS is to the right of RS*, that Home is the (a)-abundant country. When Home and Foreign trade with each other, a single world relative price of cigars will be established. Using the point drawing tool, show where, along RD, this world price will be. Label this point '2'. Carefully follow the instructions above and only draw the required object. This convergence of relative prices toward a single world relative price indicates that: (b)
a. labor b. Home exports cigars and imports soybeans
The graph to the right illustrates performance differences for firms 1 and 2 (with marginal costs c1 and c2). Assume that both firms face the same demand curve. 1.) Using the point drawing tool, plot the profit-maximizing price and quantity for firm 1. Label this point 'E 1'. 2.) Using the point drawing tool, plot the profit-maximizing price and quantity for firm 2. Label this point 'E2'. Note: Carefully follow the instructions above and only draw the required objects. Firm 2 will set a (a) markup over marginal cost than firm 1.
a. lower
The most common form of price discrimination found in international trade is
dumping
A monopolist engaged in international trade will
equate marginal costs with marginal revenues in all markets.
In the figure to the right, the importing country imposes a tariff that raises the domestic price from $16 to $24 but lowers the foreign export price from $16 to $8. As a result of this tariff, consumers in the importing country
experience a welfare loss valued at $60.
The gains from trade in a model of monopolistic competition are based on comparative advantage.
false
In a model of monopolistic competition, if price is greater than average cost, then
firms will enter the industry.
The diagram to the right depicts the relationship between the wage/rental ratio (w/r) and the land/labor ratio (T/L) for flowers (FF) and soybeans (SB). The diagram indicates that
flowers are the labor intensive product and soybeans are the land intensive product.
An import quota
generates rents that might go to foreigners.
Suppose a U.S. firm builds a new plant in China to produce intermediate goods going into the production of the firm's final goods. This is an example of both ____ FDI
greenfield and vertical
The simultaneous export and import of textiles by India is an example of
intraindustry trade.
Suppose a country is labor abundant relative to the rest of the world. When it opens to trade, which factor(s) will be better off?
labor only
Suppose a monopolist is currently producing at a point where marginal revenue is below marginal cost. To maximize profits, the monopolist should produce
less
A relatively labor-abundant country has the ____ opportunity cost of producing the labor-intensive good, so it will ____ that good.
lower; export
Consider a Heckscher-Ohlin model with two countries where the factors of production are skilled and unskilled labor. After opening to trade, the skill premium will rise in
the country abundant in skilled labor.
In the figure to the right the curve labeled CC shows, for a "typical" monopolistically competitive market, the relationship between average cost and the number of firms. This curve is positively sloped because
the more firms there are, the less each firm produces.
The left- and right-hand figures given above show the Home and Foreign markets for barley. The center figure shows the world barley market, containing Home's import demand (MD) and Foreign's export supply (XS). In the absence of both transportation costs and artificial trade barriers, the world barley market achieves equilibrium with
the price at $12, trade volume at 2 million tons, and total world output at 8 million tons.
As a result of increased competition (higher number of firms n) in a monopolistically competitive industry,
the vertical intercept of the individual demand curve decreases
Modeling trade industries composed of oligopolies is problematic because
there are many competing models of oligopoly behavior.
An export subsidy never makes a country better off
true
