Lab 6
The creation of an integrated market as a result of international trade results in
lower prices. more firms, each operating at a larger scale. a wider range of choices for consumers
Which of the following best describes a characteristic of horizontal FDI?
mainly drive by the production costs differences between countries
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.
As the number of firms competing in a particular market decreases, the price charged by exporters (and domestic firms) will ________, ___________ the probability that a dumping charge will be filed.
Rise, decreasing
Intraindustry trade will tend to dominate trade flows when which of the following exists?
Small differences between relative factor availability in each country.
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 5. The equilibrium price will be $17,030.00 Prices fall in part (c) relative to part (b) because there are more firms in the combined market than in each of the individual markets. Consumers are better off with trade not only because of lower prices but because they now have more variety to choose from.
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.
Suppose the two countries we considered in the numerical example in the text were to integrate their automobile market with a third country with an annual market for 3,750,000 automobiles. Find the number of firms, the output per firm, and the price per automobile in the new integrated market after trade.
The total sales (S) in the industry after integration are 6,250,000 automobiles per year. Each producer has the following costs: fixed costs (F) of $750,000,000 and a constant marginal cost (c) of $5,000. See notes
If there are internal economies of scale, why would it ever make sense for a firm to produce the same good in more than one production facility?
This production dilemma is an example of the proximity-concentration trade-off.
Which of the following is true regarding trade costs associated with national borders?
Trade costs reduce the export sales of firms that do reach those customers across the border.
What would these choices imply for the extent of intra-firm trade across industries? That is, in what industries would a greater proportion of trade occur within firms? Intra-firm trade will be
higher in industries with a high degree of vertical FDI.
The number of firms shown by your graph is the zero-profit (or equilibrium) number because
A. more firms than the number shown would yield losses and the exodus of firms. B. the price per unit is exactly equal to the cost per unit. C. fewer firms than the number shown would yield profits and the entry of firms. D. All of the above. <----000
The figure to the right shows Home's monopolistically competitive market for computers which, initially, has 9 firms. The inverse relationship between market size and product price occurs because:
According to your graph, product price and market size are inversely related. an increase in market size allows each firm to produce more and thus have a lower average cost. The resulting economic profit entices new firms to enter, putting downward pressure on price.
What is "dumping?"
An example of one type of price discrimination.
Which of the following are direct foreign investments, and which are not?
Direct is when you own and control the asset as its boss
The figures below depict pre-trade equilibria in the Home and Foreign computer markets. Assume that Home and Foreign firms have identical costs and technology.
Foreign has the larger market. (If their # of firms is higher and Ac is lower)
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.
Given internal economies of scale, average cost is always greater than marginal cost.
horizontal foreign investment vs vertical
Investing in affiliates that replicate the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world is categorized as horizontal FDI. Investing in affiliates where the production chain is broken up, and parts of the production processes are transferred to the affiliate location is categorized as vertical FDI.
How can dumping increase profits for a monopolist?
It increases revenues more than costs if export sales are more price-responsive than domestic sales.
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 increase competition in the market, the market price falls as more firms enter an automobile market, or specifically P=17000 + (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. b. What is the equilibrium price of automobiles in the United States and Europe if the automobile industry is closed to foreign trade?
a. In the U.S., there will be 3 firms. In Europe, there will be 4. b. The equilibrium price in the U.S. is $17,050.00 The equilibrium price in Europe is $ 17,037.50.
Increased competition from trade
allows the best minus performing firms in an industry to expand the most.
The figure to the right shows Home's monopolistically competitive software market. Suppose that initially the market contains 3 firms. In this case the software market can be expected to experience
an increase in the number of firms.
Evaluate 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.
bigger country = bigger economies of scale
When a U.S. firm builds a new production facility abroad, that investment is considered
brownfield foreign direct investment
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.
The simultaneous export and import of textiles by India is an example of
intraindustry trade.
Firm exporting large to small _____ accussed of dumping. _____ differencebetween its domestic price and its export price since there will be _____ firms competing in the smaller country.
less smaller fewer
The proximity-concentration trade-off for foreign direct investment concerns the trade-off between
locating production near customers to avoid the high trade costs associated with exporting versus operating larger facilities and exporting more to take advantage of increasing returns to scale in production.
In the figure to the right the curve labeled PP shows, for a "typical" monopolistically competitive market, the relationship between product price and the number of firms. This curve is negatively sloped because
more firms give rise to more intense competition, and hence a lower price.
Offshoring
occurs when a parent contracts with an independent firm to perform specific parts of the production process in the foreign location with the best cost advantage.
As a result of increased competition (higher number of firms n) in a monopolistically competitive industry
overall productivity in the industry increases.
A firm's decision to engage in vertical foreign direct investment-to break up its production chain and move parts of that chain to a foreign affiliate -involves a trade-off between
per-unit production costs for the parts of the production chain that are being moved and average fixed costs of operating the foreign affiliate.
Trade costs explain why only a subset of firms export, and they also explain why this subset of firms will consist of
relatively larger and more productive firms.
Compared to a monopolistically competitive firm with a lower marginal cost, a firm with a higher marginal cost will
set a higher price.
The scale cutoff for foreign direct investment (FDI)long - the incentive to engage in horizontal FDI-falls as
the per-unit cost of exporting rises and the average fixed cost of setting up an additional production facility falls.
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
that this trade will lead to greater product differentiation.
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.
Modeling trade industries composed of oligopolies is problematic because
there are many competing models of oligopoly behavior.
To maximize its profits, a firm's choice between whether to export its product or engage in foreign direct investment involves a trade-off between
the per-unit cost of exporting and the average fixed cost of setting up an additional production facility.
A firm will tend to become a multinational corporation if
the per-unit cost of exporting exceeds the average fixed cost of setting up an additional production facility.
What could be some differences between the labor-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
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
A firm that exists as a monopolist in a given industry
will never sell a product where the price elasticity of demand is inelastic.
A firm's decision to engage in vertical foreign direct investment-to break up its production chain and move parts of that chain to a foreign affiliate-involves a trade-off between
per-unit production costs for the parts of the production chain that are being moved and average fixed costs of operating the foreign affiliate.
