Question 1

If a firm located in a country charges high prices on its exports and earns profits on its export sales, then:

Accepted Answer

When a firm charges high prices on its exports and earns profits on its export sales, the high export price enhances the exporting country's terms of trade. This means that the exporting country can buy more imports with the same amount of exports, which can improve their economy. However, it is important to note that this does not necessarily mean that the majority of gains from international trade accrue to the foreign buyers.

Question 2

When external scale economies exist in an industry, which of the following groups is most likely to be left worse off after the opening of free trade?

Accepted Answer

When external scale economies exist, industries benefit from larger scales of production, leading to lower average costs. Opening to free trade allows countries to specialize based on their comparative advantage. Producers in the importing country, where the industry might not be as competitive or large-scale, could be worse off due to increased competition from more efficient foreign producers, leading to potential losses in market share and profitability.

Question 3

If international trade is based on product differentiation, for a country the basis for:

Accepted Answer

If international trade is based on product differentiation, a country would export unique models or varieties demanded by some consumers in foreign markets. This is because other countries would not be able to produce the same unique products, and consumers in foreign markets would demand them, resulting in a trade opportunity for the exporting country.

Question 4

Relative to standard competitive trade, trade based on monopolistic competition has _____ impact on factor incomes.

Accepted Answer

Trade based on monopolistic competition leads to lower factor incomes because firms in monopolistically competitive markets have some market power, which allows them to charge higher prices and earn higher profits. This results in a smaller share of income going to factors of production (such as labor and capital) compared to competitive markets, where firms have no market power and so price and profit levels are lower.

Question 5

Cooperation between oligopolistic firms is difficult because:

Accepted Answer

In an oligopoly, firms are interdependent and any agreement made between them is likely to be breached by at least one firm. Each firm has an incentive to "cheat" on the agreements made because it can gain market share and profits by doing so. Therefore, cooperation between oligopolistic firms is difficult.

Question 6

Consumers of the exportable product in the exporting country gain when trade is based on:

Accepted Answer

Consumers of the exportable product in the exporting country gain when trade is based on external scale economies because these economies lead to lower production costs and thus lower prices for consumers.

Question 7

Suppose country A had been traditionally enjoying a comparative advantage in the production of good X. As a result most of the large firms manufacturing and exporting good X were concentrated in country A. However, recently it has been observed that the comparative advantage in the production of good X has shifted to country B owing better factor availability and lower input prices. Some new firms are contemplating to start operating in country B. Which of the following conditions probably must be fulfilled to ascertain that these new firms will enjoy cost advantage over the established firms in country A?

Accepted Answer

The most important factor for new firms to enjoy cost advantage over established firms in country A is the ability to achieve scale economies. For this, the output level of the new firms in country B should be large enough. Therefore, option D is the best choice. Option A is not relevant as the number of firms has no direct impact on cost advantage. Option B is also not relevant as the consumers' demand elasticity does not affect the cost advantage of the firms. Option C is partially correct as firms with higher input-output ratio have better cost efficiency, but this alone will not guarantee cost advantage over established firms without achieving scale economies.

Question 8

Suppose country A had been traditionally enjoying a comparative advantage in the production of good X. As a result most of the large firms manufacturing and exporting good X were concentrated in country A. However, recently it has been observed that the comparative advantage in the production of good X has shifted to country B owing better factor availability and lower input prices. Some new firms are contemplating to start operating in country B. Which of the following, if it happens, will indicate that the new firms in country B will not be able to operate profitably?

Accepted Answer

If the firms in country A lower their prices, it could make it difficult for the new firms in country B to compete, especially if the price cuts are significant enough to offset country B's comparative advantage in production costs.

Question 9

Suppose the global market for personal computers is monopolistically competitive. If a country engages in a two-way trade in personal computers, such trade is usually based on _____.

Accepted Answer

Personal computers in a monopolistically competitive global market are differentiated products, meaning they have unique characteristics that distinguish them from their competitors. This differentiation allows for firms to have some control over the price of their product, leading to market power. Therefore, countries engaging in two-way trade in personal computers are likely doing so based on product differentiation.

Question 10

Which of the following is true of the gravity model?

Accepted Answer

The gravity model of trade suggests that the trade flow between two countries is positively related to their economic sizes, often measured by GDP, and inversely related to the distance between them. This model does not state that trade is independent of geographical distance (A), does not primarily focus on the role of government in generating trade gains (B), nor does it suggest that trade between a developing and a developed nation is unidirectional (C).

Question 11

The _____ posits that trade flows between countries will be larger as the economic sizes of the two countries are larger and the geographic distance between the two countries is smaller.

Accepted Answer

The statement describes the gravity model, which posits that trade flows are proportional to the sizes of the economies involved and inversely proportional to the distance between them. The Heckscher-Ohlin model focuses on differences in factor endowments between countries, the theory of absolute advantage focuses on differences in productivity, and the Stolper-Samuelson theorem deals with the effects of trade on the prices of factors of production.

Question 12

Which of the following is NOT an effect of intra-industry trade, if the concerned industry is monopolistically competitive?

Accepted Answer

Intra-industry trade in a monopolistically competitive industry typically does not lead to an increase in the total output of domestic firms in the industry. Instead, it leads to a greater variety of products available to consumers and can result in lower prices and efficiency gains, but not necessarily an increase in total domestic output.

Question 13

In a monopolistically competitive market, as the number of product variants decreases, the price of a particular firm's product is likely to_____ because the demand for each variety becomes more _____.

Accepted Answer

As the number of product variants decreases in a monopolistically competitive market, each remaining product becomes more unique and faces less direct competition, leading to an increase in demand for each specific variant. This makes the demand for each product more inelastic, as consumers have fewer substitutes to choose from, allowing firms to raise prices.

Question 14

Suppose the market for personal computers in country A is monopolistically competitive. Country A exports as well as imports personal computers from the rest of the world. After full adjustment to the opening of trade, a firm in this industry which enjoys scale economies will:

Accepted Answer

After opening to trade, increased competition and access to a larger market typically lead to lower prices due to economies of scale and increased efficiency.

Question 15

When external scale economies exist in an industry, new trade opportunities will cause:

Accepted Answer

When external scale economies exist in an industry, new trade opportunities will benefit the consumers in both the exporting and the importing countries as they will have access to more diverse and potentially cheaper goods and services. Therefore, option A is the correct answer.

Question 16

External scale economies are more likely to arise in an industry:

Accepted Answer

External scale economies arise when firms in an industry benefit from shared knowledge, infrastructure, or technology advancements. Therefore, firms that readily share technology improvements, as stated in option C, are more likely to experience these types of economies.

Question 17

Which of the following correctly identifies an impact of the opening of trade for an industry with external economies?

Accepted Answer

Producers in the importing countries are likely to face increased competition from the imported goods, which can lead to a loss in producer surplus as they may have to lower prices or lose market share.

Question 18

In oligopoly pricing, firms are caught in a situation called prisoner's dilemma when they:

Accepted Answer

In an oligopoly, firms face a prisoner's dilemma when they compete aggressively and earn low profits, which leads to a situation where none of the firms can gain an advantage by changing their strategy, thereby resulting in an equilibrium with low profits for all firms. Cooperating to maximize profits or minimize prices is not a typical outcome of oligopoly pricing due to the presence of strategic interdependence and mutual distrust among firms.

Question 19

Which of the following features is common to both perfect competition and monopolistic competition?

Accepted Answer

Both perfect competition and monopolistic competition allow for new firms to enter the market in the long run. In perfect competition, this keeps profits at zero, while in monopolistic competition, it leads to firms earning only normal profits in the long run. A is incorrect because in perfect competition, each firm faces a perfectly elastic demand curve, while in monopolistic competition, the demand curve is downward sloping. C is incorrect because in perfect competition, firms produce homogeneous products, while in monopolistic competition, products are differentiated. D is incorrect because in perfect competition, profits are zero in the long run, while in monopolistic competition, only normal profits are earned.

Question 20

An industry in which a few firms cater to the entire market is called:

Accepted Answer

An oligopoly is an industry in which a few large firms dominate the market and have the ability to influence the market price. This is different from a monopoly, which is a market controlled by a single firm, and perfect competition, which has many small firms competing with each other. Monopsony refers to a market in which there is only one buyer for a particular good or service.

Quiz 6: Scale Economies, Imperfect Competition, and Trade