ECON 136 MT 2 (Lab 3-5)
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. You are given the following information: The total sales (S) in the industry after integration are 6,250,000 automobiles per year. The marginal revenue curve facing any one producer is described by the equation MR=(P−30,000×Q)/S. Each producer has the following costs: fixed costs (F) of $750,000,000 and a constant marginal cost (c) of $5,000. In equilibrium, the number of firms will be ______. The equilibrium price will be _______. The equilibrium output per firm is _______.
15, $7000, 416667
The creation of an integrated market as a result of international trade results in
All of the above. (a wider range of choices for consumers. lower prices. more firms, each operating at a larger scale.)
The Internet has allowed for increased trade in services such as programming and technical support, a development that has lowered the prices of such services relative to manufactured goods. India in particular has been recently viewed as an "exporter" of technology-based services, an area in which the United States had been a major exporter. Using manufacturing and services as tradable goods, create a standard trade model for the U.S. economy that shows how relative price declines in exportable services that lead to the "outsourcing" of services can reduce welfare in the United States. Using the graph to the right, show the initial free trade equilibrium in the U.S. 1.) Using the line drawing tool, draw the isovalue line. Label the line VV1. 2.) Using the 3-point curved line drawing tool, draw the corresponding indifference curve. Label the curve I1. Assume the internet has allowed for increased trade in services. 3.) Using the line drawing tool, draw a new isovalue line. Label the line VV2. 4.) Using the 3-point curved line drawing tool, draw the indifference curve. Label the curve I2.
Click image
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. Assuming that the fixed cost (assumed to be the same for both firms) cannot be recovered and does not enter into operating profits, plot the operating profits for each firm. 1.) Using the rectangle drawing tool, plot the area representing operating profits for firm 1. Properly label this area. 2.) Using the rectangle drawing tool, plot the area representing operating profits for firm 2. Properly label this area. Firm 1 will earn ______ profits than firm 2.
Click on image. Higher
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 'E1' 2.) Using the point drawing tool, plot the profit-maximizing price and quantity for firm 2. Label this point 'E2' Firm 2 will set a ________ markup over marginal cost than firm 1.
Click the image. Lower
Assume that Norway and Sweden trade with each other, with Norway exporting fish to Sweden, and Sweden exporting Volvos (automobiles) to Norway. Due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced in Norway, and an increase in the relative world price for fish, Pf/Pa. Show how the overfishing problem can result in an increase an increase in welfare for Norway. 1.) Using the 3-point curved line drawing tool, draw the new PPF. Label the curve TT2. 2.) Using the line drawing tool, draw the new isovalue line. Label the line VV2. 3.) Using the 3-point curved line drawing tool, draw the new indifference curve. Label the line I2.
Click the image. Do curve TT2, line VV2, then line l2. BE CAREFUL.
The diagram to the right shows the production and consumption possibilities for Norway in the absence of trade. Norway has a long coast that borders on the north Atlantic, making it relatively more productive in fishing. Assume that Norway and Sweden trade with each other, with Norway exporting fish to Sweden, and Sweden exporting Volvos (automobiles) to Norway. Illustrate the gains from trade in Norway using the standard trade model. Draw three objects: 1.) Using the line drawing tool, draw the new isovalue line allowing for trade. Label the line VV2. 2.) Using the three-point curved line drawing tool, draw a new indifference curve. Label the curve I2. 3.) Using the point drawing tool, indicate the new consumption point that clearly identifies gains from trade. Label the point D2.
Click the image. do VV2 line, then curve l2, then point D2.
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. Most of the world's aluminum is smelted in Norway or Canada. Half of the world's large jet aircraft are assembled in Seattle. Most semiconductors are manufactured in either the United States or 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
For 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 come from plants in Ohio, Indiana, or Alabama. All airframes for Airbus, Europe's only producer of large aircraft, are assembled in Toulouse, France. Cranbury, New Jersey, is the artificial flavor capital of the United States.
External, Internal, Internal, External
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. Based on the outcomes revealed by these graphs, it can be concluded that
Foreign has the larger market.
From an economic point of view, India and China are somewhat similar: Both are huge, low-wage countries, probably with similar patterns of comparative advantage, which until recently were relatively closed to international trade. China was the first to open up. Now that India is also opening up to world trade, how would you expect this to affect the welfare of China? Of the United States? (Hint: Think of adding a new economy identical to that of China to the world economy.)
From China's perspective, the world relative supply curve will shift to the right. This shift will worsen China's terms of trade. The U.S. purchase of Chinese exports will benefit the U.S. by increasing the relative price of goods that the U.S. exports.
I. The graph to the right depicts the relative world demand and supply curves for flowers. Home currently exports the labor intensive flowers and Foreign exports the land intensive soybeans. The current equilibrium in the market occurs at point X. Recall that the relative quantity of flowers is computed as (Qf+Q*f)/(Qs+Q*s), while the relative price of flowers is computed Pf/Ps. Suppose that Home creates an export subsidy for flowers. 1.) Using the line drawing tool, draw the new relative demand curve. Label it RD2. 2.) Using the line drawing tool, draw the new relative supply curve. Label it RS2. 3.) Using the point drawing tool, plot the new market equilibrium point indicating the new terms of trade. Label the point 'Z'. II. Which of the following statements is unambiguously true?
I. Click the image II. Home's terms of trade worsen.
I. The graph to the right depicts the relative world demand and supply curves for flowers. Home currently exports the labor intensive flowers and Foreign exports the land intensive soybeans. The current equilibrium in the market occurs at point X. Recall that the relative quantity of flowers is computed as (Qf+Q*f)/(Qs+Q*s), while the relative price of flowers is computed Pf/Ps. Suppose that Home places an import tariff on soybeans. 1.) Using the line drawing tool, draw the new relative demand curve. Label it RD2. 2.) Using the line drawing tool, draw the new relative supply curve. Label it RS2. 3.) Using the point drawing tool, plot the new market equilibrium point indicating the new terms of trade. Label the point 'Z'. II. The impact on the terms of trade of an import tariff depends on
I. Click the image. II. how large a tariff imposing country is to the rest of the world.
Consider the figure to the right, in which two countries (country A and country B) that can produce a good are subject to forward-falling supply curves. In this case, the two countries have the same costs, so that their supply curves are identical. I. What would you expect to be the pattern of international specialization and trade? What would determine who produces the good? II. What are the benefits of international trade in this case? Do they accrue only to the country that gets the industry?
I. If one country starts out as a producer of a good, then all production will occur in that particular country and it will export to the rest of the world. Likely historical accident or chance would determine who produces the good. II. Consumers in both countries are better off because of lower prices.
I. 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 provides an export subsidy to its domestic flower producers. The provision of an export subsidy to flower producers by Home will cause II. 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?
I. an improvement in Foreign's terms of trade. II. It worsens Home's terms of trade but aids its exporting sector as the internal relative price of flowers declines.
I. 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 it imports from Foreign. The imposition of the import tariff on soybeans by Home will cause: II. 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
I. Home's terms of trade to improve. II. decreases Home's internal relative price of flowers while benefiting the importing sector.
How do economies of scale give rise to international trade?
International trade occurs because it increases the market size.
How can dumping increase profits for a monopolist?
It increases revenues more than costs if export sales are more price-responsive than domestic sales.
Why do internal economies of scale lead to imperfectly competitive industries?
Large firms have cost advantages over small firms.
A decrease in the real interest rate will likely lead to
Less future consumption in favor of present consumption.
Intraindustry trade will tend to dominate trade flows when which of the following exists?
Small differences between relative factor availability in each country.
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.
According to the model of intertemporal trade, a country is most likely to borrow internationally if
The returns on investment in this country are high.
What is a "forward-falling supply curve"?
The supply curve of a perfectly competitive industry with external economies.
Take a look at the graph to the right. It depicts an economy, Home, and its production possibilities frontier (TT) that indicates various combinations of flowers and computers that it can produce. Assume that flowers are labor intensive and that computers are technology intensive. Home currently exports flowers. Originally the Home economy produced along TT. Home then experienced growth that caused its PPF to shift to TT2. Which of the following is a plausible description of the growth experienced by the Home economy?
There has been a technological development in the production of computers.
What advantages can a localized industrial cluster provide? By bringing many firms together in one geographic location, a localized industrial cluster provides a market large enough to support
a network of suppliers that can specialize in what they do best, contract out other aspects of their businesses, and offer cheaper and more easily accessible products to other firms in the same area.
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=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 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 __________ to choose from.
a. 3 and 4 b. 17,050 and 17037.50 c. 5 and 17030 d. more and more variety
External economies of scale
are more likely to be associated with a perfectly competitive industry.
External economies of scale occur when average costs
fall as the industry grows larger but rise as the representative firm grows larger.
Internal economies of scale occur when the average costs
fall as the representative firm grows larger.
Given the intertemporal production possibilities frontier combined with several indifference curves (showing preferences for current and future consumption) in the diagram to the right. With trade, this country is likely to _________ future consumption goods, and consume ___________ present consumption goods relative to the absence of trade.
import, fewer
Consider the response of firms in a world with two identical countries (Home and Foreign). Assume that a firm must incur an additional cost t for each unit of output that it sells to customers across the border. Consider the decisions of firms 1 and 2 (with marginal costs c1 and c2) in the figures below. Firm 2 can operate
in its domestic market only
If output more than doubles when all inputs are doubled, production is governed by
increasing returns to scale.
The simultaneous export and import of textiles by India is an example of
intraindustry trade.
The figure to the right shows Home's monopolistically competitive market for computers which, initially, has 9 firms. According to the relationship shown in the graph, product price (PP) and market size are ________ related. The inverse relationship between market size and product price occurs because: 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.
inversely 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.
Increased competition from trade
is associated with sales opportunities in new markets for surviving firms
Where there are economies of scale, an increase in the size of the market will
lead to more firms producing and selling in that market and lower the price per unit.
Internal economies of scale
may be associated with an imperfectly competitive industry.
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.
It is often argued that the existence of increasing returns is a source of conflict between countries, since each country is better off if it can increase its production in those industries characterized by economies of scale. Evaluate this view in terms of both the monopolistic competition and the external economy models. By concentrating the production of each good with economies of scale in one country rather than spreading the production over several countries, the world economy will use the same amount of labor to produce __________ output. In the __________ model, such a concentration of labor benefits the host country, which can also capture some monopoly rents, while it may hurt the rest of the world which could then face higher prices on its consumption goods. In the __________ case, such monopolistic pricing behavior is less likely since imperfectly competitive markets are less likely.
more, monopolistic competition, external economies
Given the intertemporal production possibilities frontier combined with several indifference curves (showing preferences for current and future consumption) in the diagram to the right. A decrease in the real interest rate will cause this country to produce ___________ future consumption goods,export ___________ present consumption goods,and make domestic consumers ___________.
more, more, worse off
Explain the analogy between international borrowing and lending and ordinary international trade. The analysis of intertemporal 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 intertemporally.
present consumption and future consumption 1/1+r low greater
It is argued that a localized industrial cluster of firms can enjoy external economies by creating a pooled market for workers with highly specialized skills. In what ways can such a pooled labor market be advantageous and who could benefit? Labor market pooling can
reduce the likelihood of labor shortages for producers and unemployment for workers.
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.
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 when 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 an industry,
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.
British economist Alfred Marshall argued that there are three main reasons, which are still valid today, as to why a cluster of firms may be more efficient than an individual firm in isolation. What are those three reasons? The three reasons why a cluster of firms may be more efficient than an individual firm in isolation are:
the ability of a cluster to support specialized suppliers; the way that a geographically concentrated industry allows labor market pooling; and the way that a geographically concentrated industry helps foster knowledge spillovers.
Where there are economies of scale, the scale of production possible in a country is constrained by
the combined size of the domestic and foreign market.
The graph to the right depicts an economy, Home, which produces flowers and soybeans. Its production possibilities frontier is shown as TT. One of Home's isovalue lines is also shown as VV. Home exists and trades with a second country, Foreign which also produces flowers and soybeans. Suppose that (Pf/Ps) has decreased. Then,
the income effect leads to a decrease in consumption of flowers and soybeans while the substitution effect causes more flowers to be consumed and fewer soybeans to be consumed.
What type of knowledge spillover takes place more effectively in localized industrial clusters? The knowledge spillover that takes place more effectively in localized industrial clusters is
the informal exchange of information and ideas at a personal level when employees of different companies in those clusters mix socially and talk freely about technical issues.
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.