econ chapter 5
If social returns to the production of a good are less than private returns, then we can conclude that relative to the social optimum, the good will be
overproduced and underpriced
If some industries exhibit internal increasing returns to scale in each country, we should not expect to see
perfect competition in these industries
Imperfectly competitive firms have a demand curve that ________ and a marginal revenue curve that ________ and is ________ the demand curve.
slopes downward; slopes downward; below
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.
Free market economies underproduce goods with positive externalities because
the additional social benefits are not taken into account by the marketplace
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
What are the two necessary conditions for dumping to occur?
imperfect competition exists, markets are segmented
When there are external economies of scale, an increase in the size of the market will
increase the number of firms and lower the price per unit
If a firm's output *more than doubles* when all inputs are *doubled*, production is said to occur under conditions of
increasing returns to scale
One factor that may help explain why some countries benefit more from geographical concentration is that
they had a head start over other nations
When the United States signed a free-trade agreement with Canada (1989), no one thought twice about it. When the agreement with Mexico was signed (1994), there was significant opposition. The concepts of interindustry and intraindustry trade can explain the differences in opposition to the two trade agreements in the following manner:
-Given the productivity, technology, and factor endowment similarities between the U.S. and Canada, trade between the two is intraindustry, and such trade generally yields greater benefits than interindustry trade. -Substantial productivity, technology, and factor endowment differences between the U.S. and Mexico make trade between them interindustry, and this type of trade is seen as more threatening to jobs and firms. -Trade between the U.S. and Mexico is interindustry trade, and such trade is comparative advantage-based. While consumers get the benefit of lower import prices with such trade, they also face the hardship of paying higher prices for export goods.
The creation of an integrated market as a result of international trade results in
-a wider range of choices for consumers -more firms, each operating at a larger scale -lower prices
Which of the following is a theoretical justification for targeting the development of specific industries?
-overcome inefficiencies created by historical accidents -counteract a market failure
How do economies of scale give rise to international trade? These economies of scale are ________ economies of scale
International trade occurs because economies of scale make a comparative advantage; *internal*
Why do internal economies of scale lead to imperfectly competitive industries?
Large firms have cost advantages over small firms
Which of the following are true statements about intra-industry trade?
The majority of U.S. and European trade is intra-industry trade.
The European Union is considering entering the market. Their government is offering a subsidy of $30. Should the EU enter the market? Should the U.S. stay in the market? Does the WTO allow direct subsidies of this kind?
Yes; No; No
Intra-industry trade is most common in the trade patterns of
advanced industrial nations
External economies of scale:
are more likely to be associated with a perfectly competitive industry.
Internal economies of scale:
are more likely to be associated with an imperfectly competitive industry
the existence of internal economies of scale
cannot be associated with a perfectly competitive industry
A monopolistic firm
chooses an output at which marginal revenue equals marginal cost
If a firm's output *doubles* when all inputs are *doubled*, production is said to occur under conditions of
constant returns to scale
An industry is characterized by scale economies, and exists in two countries. Should these two countries engage in trade such that the combined market is supplied by one country's industry, then
consumers in both countries would have more varieties and lower prices.
If a firm's output *less than doubles* when all inputs are *doubled*, production is said to occur under conditions of
decreasing returns to scale
Firms that produce ________ products must be ________ competitive.
differentiated; imperfectly
Does a firm with price setting power face a downward-sloping demand curve or a horizontal demand curve?
downward-sloping demand curve
The most common form of price discrimination in international trade is
dumping
External economies of scale occur when average costs of a firm:
fall as the industry grows larger, but may or may not rise as the representative firm grows larger
Internal economies of scale occur when the average costs of the firm:
fall as the representative firm grows larger
External economies of scale arise when the cost per unit
falls as the industry grows larger and rises as the average firm grows larger
in an industry where transportation costs are high and there are limited scale economies,
firms will locate close to the market
In order for a firm to be able to "dump" a good on a foreign market, it must have market price setting power in which market, home or abroad?
home
Two countries engaged in trade in products with no scale economies, produced under conditions of perfect competition, are likely to be engaged in
inter-industry trade
The simultaneous export and import of textiles by India is an example of:
intra-industry trade
Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in
intra-industry trade
When a country both exports and imports a type of commodity, the country is engaged in
intra-industry trade
The learning curve describes the ________ relationship between ________ and ________.
inverse; unit cost; cumulative output
Which of the following is not the reason for external economies of scale?
large fixed costs
If the market for products produced by firms in a monopolistically competitive industry becomes ________, then there will be ________ firms and each firm will produce ________ output and charge a ________ price.
larger; more; more; lower
External economies of scale often arise because similar firms
locate in the same geographic region
If a firm increases its output in the ________ and unit costs ________, then the firm is experiencing ________ of scale
long run; decrease; economies
If there are a large number of firms in a monopolistically competitive industry
long-run profit will be equal to zero
If a firm increases its output in the ________ and unit costs ________, then the firm is experiencing ________ of scale.
long-run; decrease; economies
If there are a large number of firms in a monopolistically competitive industry,
long−run profit will be equal to zero.
A monopoly firm will maximize profits by producing where
marginal revenue is the same in domestic and foreign markets.
When a private market fails to deliver an optimal quantity of goods and services it is called
market failure
Most foreign investment today is directed towards high-income countries because
markets are larger, so transportation costs are minimized by producing near the market
The existence of external economies of scale
may be associated with a perfectly competitive industry
Trade models built exclusively on the idea of comparative advantage have a ______ record when it comes to predicting a country's trade patterns
mixed
Market failures are less likely to occur whenever
new firms can easily attract start-up capital
WTO rules allow subsidies
of precompetitive activities such as research
Monopolistic competition is associated with
product differentiation
Internal economies of scale will ________ average cost when output is ________ by ________
reduce; increased; a firm
One advantage of the specialization that results from international trade is that countries can take advantage of
scale economies
Geographical concentration is
self-reinforcing
Intra−industry trade is most common in the trade patterns of
the industrial countries of Western Europe
In an industry where firms experience internal scaleeconomies, the long−run cost of production will depend on
the size of the market
Modeling trade in imperfectly competitive industries is problematic because
there is no single generally accepted model of behavior by imperfectly competitive firms.
If social returns to the production of a good are greater than private returns, then we can conclude that relative to the social optimum, the good will be
underproduced and overpriced
A firm in long−run equilibrium under monopolistic competition will earn
zero economic profits because of free entry.
