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.