Deck 6: Scale Economies, Imperfect Competition, and Trade

Question 1

Which of the following indicates the difference between the volume of exports and imports of a product?

A)Net trade
B)Intra-industry trade
C)Total trade
D)Terms of trade

Answer 1

A

Question 2

Which of the following refers to a two-way trade in which a country both exports and imports the same or very similar products?

A)Net trade
B)Inter-industry trade
C)Intra-industry trade
D)Internal trade

Answer 2

C

Question 3

Internal scale economies occur when:

A)expansion of output by a firm leads to greater specialization of labor.
B)expansion in an industry drives down the input prices.
C)industry growth leads to a greater diffusion of knowledge among firms.
D)a firm pays higher input prices to expand production.

Answer 3

A

Question 4

The table given below shows the export and import values of automobiles, pharmaceuticals, and clothing in country A and country B. $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } & 20 & 40 \\\hline \text { Pharmaceuticals } & 30 & 30 \\\hline \text { Clothing } & 40 & 0 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } &0 & 20 \\\hline \text { Pharmaceuticals } & 40 & 40 \\\hline \text { Clothing } & 45 & 35 \\\hline\end{array}$$ In country B, the product with the highest intra-industry trade (IIT) share is _____ and the product with the lowest IIT share is _____.

A)automobiles; pharmaceuticals
B)pharmaceuticals; automobiles
C)clothing; automobiles
D)clothing; pharmaceuticals

Question 5

The table given below shows the export and import values of automobiles, pharmaceuticals, and clothing in country A and country B. $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } & 20 & 40 \\\hline \text { Pharmaceuticals } & 30 & 30 \\\hline \text { Clothing } & 40 & 0 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } &0 & 20 \\\hline \text { Pharmaceuticals } & 40 & 40 \\\hline \text { Clothing } & 45 & 35 \\\hline\end{array}$$ The weighted-average of the intra-industry trade (IIT) shares in country A's trade in automobiles, pharmaceuticals and clothing is:

A)0.625.
B)0.875.
C)0.4375.
D)1.286.

Question 6

The Heckscher-Ohlin theory predicts that trade between similar industrialized countries should:

A)be much greater than trade between developed and developing countries.
B)be rather limited in volume.
C)consist mainly of highly sophisticated manufactured goods.
D)be bidirectional with one country exporting products to the other countries and simultaneously importing very similar products from them.

Question 7

Suppose the amount of exports of textile machinery from Italy to the rest of the world equals 60 billion tons. The amount of imports of textile machinery into Italy from the rest of the world is 40 billion tons. Therefore, the intra-industry trade share for machinery is:

A)0.2.
B)0.8.
C)1.5.
D)0.67.

Question 8

Scale economies are said to be present when:

A)an increase in output leads to an increase in average cost.
B)an increase in output has no impact on average cost.
C)an increase in output leads to a decrease in average cost.
D)there is a single firm in an industry.

Question 9

When the average cost of a typical firm declines as the output of the industry within a geographic area increases it is referred to as:

A)internal scale economies.
B)external scale economies.
C)internal scale diseconomies.
D)constant returns to scale.

Question 10

Which of the following is the formula for the intra-industry trade (IIT) share in a product's total trade?

Question 11

A monopolistically competitive firm:

A)sets price of its product equal to its marginal cost of production.
B)sells a homogeneous product in the market.
C)faces a perfectly elastic demand curve.
D)earns zero economic profits in the long-run.

Question 12

The table given below shows the export and import values of automobiles, pharmaceuticals, and clothing in country A and country B. $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } & 20 & 40 \\\hline \text { Pharmaceuticals } & 30 & 30 \\\hline \text { Clothing } & 40 & 0 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } &0 & 20 \\\hline \text { Pharmaceuticals } & 40 & 40 \\\hline \text { Clothing } & 45 & 35 \\\hline\end{array}$$ The weighted average of the intra-industry trade (IIT) shares in country B's trade in automobiles, pharmaceuticals and clothing is:

A)0.895.
B)2.000.
C)0.417.
D)0.833.

Question 13

The table given below shows the export and import values of automobiles, pharmaceuticals, and clothing in country A and country B. $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } & 20 & 40 \\\hline \text { Pharmaceuticals } & 30 & 30 \\\hline \text { Clothing } & 40 & 0 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } &0 & 20 \\\hline \text { Pharmaceuticals } & 40 & 40 \\\hline \text { Clothing } & 45 & 35 \\\hline\end{array}$$ Country B has a higher intra-industry trade (IIT) share compared to country A for:

A)only automobiles.
B)only pharmaceuticals.
C)only clothing.
D)both pharmaceuticals and clothing.

Question 14

Which of the following can best explain the clustering of some industries, such as banking and finance in New York City and high-technology computer production in Silicon Valley?

A)External scale economies
B)Perfect competition
C)Intra-industry trade
D)Comparative advantage

Question 15

Which of the following can help explain the rise of intra-industry trade?

A)Recent recessions and increase in the price of oil have led to lower national income levels.
B)The demand for product variety has increased substantially over time.
C)Countries widely vary in terms of their resource endowments.
D)The developed nations have recently implemented more conservative fiscal policies.

Question 16

_____ is a market structure in which a large number of firms compete vigorously with each other in producing and selling different varieties of a basic product.

A)Perfect competition
B)Monopoly
C)Oligopoly
D)Monopolistic competition

Question 17

When firm X doubled its output, it was found that its cost per unit declined by 10%. It can be concluded that:

A)the firm was facing external scale diseconomies.
B)the firm was enjoying internal scale economies.
C)the firm was operating on the inelastic portion of the demand curve.
D)the marginal cost of production at the initial output level was constant.

Question 18

The table given below shows the export and import values of automobiles, pharmaceuticals, and clothing in country A and country B. $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } & 20 & 40 \\\hline \text { Pharmaceuticals } & 30 & 30 \\\hline \text { Clothing } & 40 & 0 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | } \hline \text { Country B } & \text { Exports (\$billions) } & \text { Irmports (\$billions) } \\\hline \text { Autornobiles } & 0 & 20 \\\hline \text { Pharmacenticals } & 40 & 40 \\\hline \text { Clothing } & 45 & 35 \\\hline\end{array}$$ In country A, the product with the highest intra-industry trade (IIT) share is _____ and the product with the lowest IIT share is _____.

A)automobiles; pharmaceuticals
B)pharmaceuticals; clothing
C)clothing; automobiles
D)clothing; pharmaceuticals

Question 19

The table given below shows the export and import values of automobiles, pharmaceuticals, and clothing in country A and country B. $$\begin{array} { | c | c | c | } \hline \text { Country A } & \text { Exports (\$billions) } & \text { Imports (\$billions) } \\\hline \text { Automobiles } & 20 & 40 \\\hline \text { Pharmaceuticals } & 30 & 30 \\\hline \text { Clothing } & 40 & 0 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | } \hline \text { Country B } & \text { Exports (\$billions) } & \text { Irmports (\$billions) } \\\hline \text { Autornobiles } & 0 & 20 \\\hline \text { Pharmacenticals } & 40 & 40 \\\hline \text { Clothing } & 45 & 35 \\\hline\end{array}$$ The IIT share is zero for _____ in country A and for _____ in country B.

A)pharmaceuticals; pharmaceuticals
B)clothing; pharmaceuticals
C)automobiles; pharmaceuticals
D)clothing; automobiles

Question 20

Which of the following is true of intra-industry trade?

A)Intra-industry trade is mostly based on the differences stressed in the Heckscher-Ohlin trade theory.
B)Intra-industry trade is usually discouraged by the government.
C)Intra-industry trade is said to occur when the United States exports Ford automobiles and imports Honda automobiles.
D)Intra-industry trade is said to occur when the United States exports Ford automobiles and imports petroleum.

Question 21

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

A)the profit earned by the firm is not considered as a part of the exporting country's GDP.
B)the firm emerges as a natural monopolist in the long-run.
C)the high export price enhances the exporting country's terms of trade.
D)the majority of the gains from international trade accrue to the foreign buyers.

Question 22

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?

A)Consumers in the importing country
B)Producers in the importing country
C)Consumers in the exporting country
D)Producers in the exporting country

Question 23

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

A)exporting is the domestic production of unique models or varieties demanded by some consumers in foreign markets.
B)importing is that the price of the imports is the same as the price of the domestic products.
C)importing is that foreign firms usually enjoy external scale economies.
D)exporting is that the domestic producers can charge a much higher price in the international markets.

Question 24

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

A)greater
B)lower
C)the same
D)no

Question 25

Cooperation between oligopolistic firms is difficult because:

A)firms gain more through competition.
B)firms rarely have mutual interests.
C)each firm has an incentive to "cheat" on the agreements made.
D)each firm has a monopoly power on its own product.

Question 26

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

A)different factor endowments.
B)technological differences.
C)external scale economies.
D)increasing-cost industries.

Question 27

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?

A)The number of firms to begin operation in country B must be greater than the number of firms operating in country A.
B)The consumers in country B should have a relatively elastic demand compared to the consumers in country A.
C)The new firms in country B should have a higher input-output ratio than the firms operating in country A
D)The output level of the new firms in country B should be large enough to enable them to enjoy scale economies.

Question 28

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?

A)The firms in country A will expand production beyond the optimum point and will experience an increase in per unit cost with a further increase in output.
B)The demand for good X will increase substantially in country A in recent future.
C)The firms in country A will lower the prices for their products.
D)The input prices in country A are likely to increase significantly in the near future.

Question 29

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 _____.

A)external scale economies
B)comparative advantage
C)product differentiation
D)constant returns to scale

Question 30

Which of the following is true of the gravity model?

A)The gravity model states that the trade flows between two countries is independent of the geographical distance between them.
B)The gravity model emphasizes on the role of the government to generate adequate gains from trade.
C)The gravity model states that trade flows between a developing and a developed nation is usually unidirectional.
D)The gravity model states that the trade flows between two countries is directly proportional to their GDP.

Question 31

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.

A)Heckscher-Ohlin model
B)theory of absolute advantage
C)gravity model
D)Stolper-Samuelson theorem

Question 32

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

A)There are considerable national gains that arise from trade because there is an increase in the number of varieties of products available in the country.
B)Domestic consumers gain because such trade results in lower prices of domestic varieties of the good.
C)Total output of the domestic firms in the industry increases as a result of such trade.
D)There are few shifts in production between industries that put pressures on factor prices.

Question 33

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 _____.

A)increase; elastic
B)decrease; elastic
C)increase; inelastic
D)decrease; inelastic

Question 34

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:

A)receive a higher price for its product.
B)receive a lower price for its product.
C)enjoy a greater market share.
D)ultimately go out of business.

Question 35

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

A)the consumers in both the exporting and the importing countries to gain.
B)the consumers in the exporting country to gain but the consumers in the importing country to lose.
C)the consumers in both the importing and exporting countries to lose.
D)the consumers in the importing country to gain but the consumers in the exporting country to lose.

Question 36

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

A)in which a single firm caters to the total market demand.
B)in which a few dominant firms compete aggressively with each other in terms of product prices.
C)in which firms readily share technology improvements.
D)which is solely export oriented.

Question 37

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

A)Consumers of the product in the exporting country lose consumer surplus.
B)Producers of the product in the importing countries lose producer surplus.
C)Consumers of the product in the importing country lose consumer surplus.
D)Producers of the product in the exporting country lose producer surplus.

Question 38

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

A)cooperate to maximize profits.
B)cooperate to minimize prices.
C)compete aggressively and earn high profits.
D)compete aggressively and earn low profits.

Question 39

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

A)An individual firm faces a horizontal demand curve.
B)New firms are free to enter the market in the long-run.
C)Each firm produces a perfectly homogeneous product.
D)The firms earn positive economic profit in the long run.

Question 40

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

A)a monopoly.
B)an oligopoly.
C)a perfect competition.
D)a monopsony.

Question 41

What is intra-industry trade? Is intra-industry trade consistent with the predictions of the Heckscher-Ohlin theory? Explain, and relate your discussion to evidence about trade between industrialized countries and developing counties, and about trade among industrialized countries.

Question 42

If substantial internal scale economies exist, production of a commodity tends to be concentrated in a few large facilities in a few countries.

Question 43

Explain the concept of scale economies. Explain the difference between internal and external scale economies. What pattern of trade do we expect to see in industries with substantial external scale economies?

Question 44

A large amount of intra-industry trade is not compatible with the comparative-advantage theory of trade.

Question 45

Scale economies help explain why products are produced in a limited number of varieties in a country.

Question 46

A firm is said to operate with constant returns to scale if its input cost increases by four times when its output is doubled.

Question 47

Under monopolistic competition, new firms are barred from entering the industry in the long run.

Question 48

According to the gravity model, countries that share a common language trade more with each other.

Question 49

"In the shift from no trade to free trade, the monopolistic-competition model can predict which specific varieties of products will be produced by which countries, and the models based on substantial scale economies can predict which countries will be the major production locations for a product." Are these claims correct? Explain briefly.

Question 50

Exploiting substantial scale economies is an explanation of why some industries come to be categorized as monopolistically competitive.

Question 51

Consider that in country A, there are some models of cars available in the luxury segment produced by the domestic companies. Some more models are available in the same segment in country B as well. Explain with the help of suitable figures how the consumers in both the countries gain if these countries engage in free trade.

Question 52

Studies using the gravity model have found that countries that have a common currency trade more with each other.

Question 53

Intra-industry trade in differentiated products is negligible between countries that are similar in their general production capabilities.

Question 54

A significant gain from trade in an oligopolistic market results from the increase in the number of product varieties that trade brings.

Question 55

Over time, intra-industry trade has become significantly smaller as a percentage of overall trade.

Question 56

Analysis using the gravity model shows that countries that have a higher degree of government corruption trade more with other countries.

Question 57

In an oligopoly market, firms vigorously compete with each other by selling different varieties of the same product.

Question 58

Carefully explain how, and under what conditions, an increase in foreign markets available to the United States computer producers would lead to an increase in economic well-being for consumers of computers in the United States.

Question 59

In intra-industry trade, an exporting firm may be forced to sell its product at a lower price than in the absence of trade.