Question 1

When countries create a free trade area and increase market size, the schedule relating

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Question 2

What are the gains from trade when there is an increase in the market size? Why do these gains occur?

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Question 3

A long-run equilibrium in an industry exists when

Accepted Answer

In the long run, firms in a perfectly competitive industry will enter or exit the market until price equals cost per unit. This means that firms are earning zero economic profit, and producing at the efficient scale where average total cost is minimized. This is the point at which the industry is in long-run equilibrium. Therefore, the correct answer is D, price equals cost per unit.

Question 4

Trade due to comparative advantage tends to be intraindustry.

Accepted Answer

Trade due to comparative advantage tends to be interindustry, as countries specialize in producing and exporting goods in which they have a comparative advantage, and import goods that they are less efficient at producing. This leads to trade between industries rather than within industries.

Question 5

Trade in cars between Canada and the United States occurs

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Question 6

When countries create a free trade area and increase market size, there will be

Accepted Answer

When countries create a free trade area, there will be more product variety as producers can now sell in multiple markets and have access to a larger customer base. This leads to more competition among producers, which can result in lower prices and better quality products. Therefore, increased market size leads to increased product variety and a more competitive market.

Question 7

If price is above average cost, then there are too many firms.

Accepted Answer

If the price is above average cost, it suggests that firms are making a profit and are likely operating efficiently. This would not indicate that there are too many firms.

Question 8

An increase in the size of the market due to the creation of a free trade area

Accepted Answer

The creation of a free trade area typically increases competition and market size, leading to a reduction in equilibrium prices due to increased supply and competition. Additionally, the larger market can support more firms, leading to an increase in the number of firms.

Question 9

An increase in the number of firms entering a market causes the

Accepted Answer

An increase in the number of firms entering a market causes an increase in supply, which leads to a decrease in the market price. This is because there are now more firms producing the same goods or services, leading to increased competition and a lower market price.

Question 10

A huge amount of international trade is intraindustry.

Accepted Answer

Intraindustry trade refers to the exchange of similar products between countries, such as cars being traded between Germany and Japan. It accounts for a significant portion of international trade, particularly among developed countries.

Question 11

The figure below shows the relationship between cost per unit and the number of firms producing a particular good. The downward shift in the curve from A to B is best explained by a(n)

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Question 12

Explain how there can be gains from trade between countries even if there is no difference in the efficiency of production between each country.

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Question 13

If price is above cost, then

Accepted Answer

If price is above cost, it means that firms are earning profit. This will attract new firms to enter the industry to earn profit as well. Hence, option B is the correct choice. Option A, C and D are incorrect because they suggest that firms are not earning profit. Option E is also incorrect because average cost is not relevant to the scenario given in the question.

Question 14

Suppose China and India are both able to produce tea and cloth by only using labor. In China, it takes 1 unit of labor to produce 1 kilogram of tea and 2 units of labor to produce 1 meter of cloth. In India, it takes 2 units of labor to produce 1 kilogram of tea and 2 units of labor to produce 1 meter of cloth.
(A)Suppose China has 1,000 units of labor and India has 800 units of labor. Draw the production possibilities curve without trade for each country.
(B)Which country has the absolute advantage in tea production? Which country has a comparative advantage in tea production? Which country has a comparative advantage in cloth production?
(C)In what range would the world trading price ratio lie when these countries open up to free trade?

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Question 15

As a market increases in size, average total cost declines at each firm if the number of firms does not change.

Accepted Answer

This is the concept of economies of scale, which suggests that as the scale of production increases, fixed costs get spread over a larger output, resulting in lower average total cost. However, this applies only when the number of firms in the market is constant, as increased competition can negate the benefits of economies of scale.

Question 16

When Canada and the United States permitted free trade in cars, Canadian automobile

Accepted Answer

With the advent of free trade in cars, Canadian automobile production increased due to increased demand from the United States market. This is because American manufacturers were importing cheaper Canadian-made parts, and assembling American cars, which increased the need for Canadian production.

Question 17

When the size of the market increases, the relationship between the number of firms in the market and the average total cost shifts upward.

Accepted Answer

When the size of the market increases, the average total cost may decrease due to economies of scale. Therefore, the relationship between the number of firms in the market and the average total cost may shift downward.

Question 18

Consider an industry in which, for each individual firm in the industry, cost per unit of output declines as the individual firm's output increases. As the size of the market increases, the average total cost at each firm

Accepted Answer

In an industry where cost per unit of output declines as output increases, each firm's average total cost (ATC) will decrease as the firm increases production. This is because the fixed costs associated with running the firm (such as rent, equipment, and management) can be spread over a larger number of units, thereby reducing the per-unit cost. As the size of the market increases, each firm can increase production without saturating the market, further reducing their ATC. Therefore, the average total cost at each firm decreases because each firm produces more.

Question 19

Consider an industry in which, for each individual firm in the industry, cost per unit of output declines as the individual firm's output increases. If there is an increase in the number of firms in this industry whereas the market size stays the same, then the

Accepted Answer

In an industry where cost per unit declines with increased output per firm, if more firms enter the market without an increase in market size, each existing firm will produce less. This leads to higher average total costs per firm due to reduced economies of scale.

Question 20

How does trade due to comparative advantage differ from trade due to expanded markets?

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Quiz 18: International Trade