Ch. 7: External Economies of Scale Flashcards
If a firm’s output more than doubles when all inputs are doubled, production is said to occur under conditions of:
A) intra-industry equilibrium.
B) decreasing returns to scale.
C) imperfect competition.
D) increasing returns to scale. E) constant returns to scale
D) increasing returns to scale.
One advantage of the specialization that results from international trade is that countries can take advantage of
A) scale economies.
B) taste reversals.
C) production diversification D) smaller countries.
E) lower transport costs.
A) scale economies.
Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?
Answer: There are many answers. Three of these are
(a) Increasing returns to scale and high fixed costs may be inconsistent with perfect competition. In such a case, the initial autarkic state may be a suboptimal equilibrium. For example, relative prices may not equal marginal rates of transformation. It follows from this that a change in output compositions associated with trade may result in a national welfare for one or both trading countries that is inferior to that associated with the initial autarkic conditions. Hence no “gains from trade.”
(b) In a case of increasing scale economies at the firm or plant level, the determination of which product will be exported by which country is ex-ante indeterminate. Therefore, deriving clear implications concerning the effects of trade on income distributions such as may be derived from the Samuelson-Stolper Theorem is no longer generally possible.
(c) Market structures containing positive scale economies and imperfect competition may allow for “two-way trade,” or intra-industry trade. As in b. above, the various theorems derivable from the Heckscher-Ohlin model concerning directions of trade and income distributions are no longer generally applicable.
If a firm’s output doubles when all inputs are doubled, production is said to occur under
conditions of
A) increasing returns to scale. B) imperfect competition.
C) intra-industry equilibrium.
D) constant returns to scale
E) decreasing returns to scale.
D) constant returns to scale
If a firm's output less than doubles when all inputs are doubled, production is said to occur under conditions of A) increasing returns to scale. B) imperfect competition. C) intra-industry equilibrium. D) constant returns to scale E) decreasing returns to scale.
E) decreasing returns to scale.
The existence of external economies of scale
A) tends to result in large profits for each firm.
B) may be associated with a perfectly competitive industry.
C) cannot be associated with a perfectly competitive industry.
D) tends to result in one huge monopoly.
E) focuses more on individual firms than the industry as a whole.
B) may be associated with a perfectly competitive industry.
The existence of internal economies of scale
A) may be associated with a perfectly competitive industry.
B) is associated only with sophisticated products such as aircraft.
C) cannot be associated with a perfectly competitive industry.
D) cannot form the basis for international trade.
E) focuses more on the industry than individual firms.
D) cannot form the basis for international trade.
When there are external economies of scale, an increase in the size of the market will
A) not affect the number of firms, but will lower the price per unit.
B) decrease the number of firms and lower the price per unit.
C) decrease the number of firms and raise the price per unit.
D) increase the number of firms and raise the price per unit. E) increase the number of firms and lower the price per unit.
E) increase the number of firms and lower the price per unit.
If some industries exhibit internal increasing returns to scale in each country, we should not expect to see
A) intra-industry trade between countries.
B) high levels of specialization in both countries.
C) inter-industry trade between countries.
D) perfect competition in these industries.
E) increased productivity in both countries.
D) perfect competition in these industries.
If a scale economy is the dominant technological factor defining or establishing comparative advantage, then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance, or historical accident. Explain, and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage.
This statement is true, since the reason the seller is a monopolist may be that it happened to have been the first to produce this product in this country. It may have no connection to any supply or demand related factors; nor to any natural or man-made availability. This is all exactly the opposite of the Heckscher-Ohlin Neo-Classical model’s explanation of the determinants of comparative advantage.
External economies of scale arise when the cost per unit
A) rises as the industry and the average firm grows larger.
B) remains constant over a broad range of output.
C) falls as the industry and the average firm grows larger.
D) falls as the industry grows larger and rises as the average firm grows larger.
E) rises as the industry grows larger and falls as the average firm grows larger.
D) falls as the industry grows larger and rises as the average firm grows larger.
Internal economies of scale arise when the cost per unit
A) falls as the industry grows larger.
B) remains constant over a broad range of output.
C) rises as the industry grows larger.
D) falls as the average firm grows larger.
E) rises as the average firm grows larger.
D) falls as the average firm grows larger.
Where there are internal economies of scale, the scale of production possible in a country is constrained by
A) the size of the country.
B) the size of the domestic market.
C) the size of the trading partner’s country.
D) the size of the foreign market.
E) the size of the domestic plus the foreign market.
E) the size of the domestic plus the foreign market.
Internal economies of scale will \_\_\_\_\_\_\_\_ average cost when output is \_\_\_\_\_\_\_\_ by \_\_\_\_\_\_\_\_. A) reduce; increased; a firm B) reduce; increased; the industry C) increase; increased; a firm D) reduce; reduce; the industry E) increase; increased; the industry
A) reduce; increased; a firm
Why is it that if an industry is operating under conditions of internal scale economies then the resultant equilibrium cannot be consistent with the pure competition model?
Because once one firm becomes bigger than another, or if one firm began the industry, then no other firm will be able to match its per unit cost, so that they would be driven out of the industry. The firm would become a natural monopoly.
Is it possible for an equilibrium that is consistent with purely competitive conditions to arise in an industry with positive scale economies? If so, explain how this could happen. If not, why not?
Yes. If the scale economies were external to the firm, then there is no reason why the firms may not be in perfect competition.
External economies of scale will \_\_\_\_\_\_\_\_ average cost when output is \_\_\_\_\_\_\_\_ by \_\_\_\_\_\_\_\_. A) reduce; increased; the industry B) reduce; increased; a firm C) increase; increased; a firm D) increase; increased; the industry E) reduce; reduce; the industry
A) reduce; increased; the industry
What is meant by “a cluster of firms” and what are the three main sources of the economic advantages derived from locating in such a district?
A cluster of firms is a geographical concentration of firms in the same industry. Silicon Valley and Bollywood are modern examples. The advantages are (1) specialized suppliers, (2) labor market pooling, and (3) knowledge spillovers.
External economies of scale often arise because similar firms
A) have excellent internal logistics.
B) locate in the same geographic region.
C) collude to fix prices and increase profits.
D) agree to cooperate to expand global trade.
E) have economies of scale in production.
B) locate in the same geographic region.
The Internet has made transactions between businesses (B2B trading) fast and easy. Any business in any location can access specialized knowledge, labor, and materials. It is likely that these virtual economic communities will result in
A) consolidation of industries into a small number of powerful firms.
B) internal economies of scale.
C) suppression of innovations and collusive behavior, driving up prices.
D) government intervention and regulation.
E) external economies of scale.
E) external economies of scale.
The long-run market supply curve in the presence of internal economies of scale is \_\_\_\_\_\_\_\_, and in the presence of external economies of scale, it is \_\_\_\_\_\_\_\_. A) horizontal; upward sloping B) downward sloping; downward sloping C) upward sloping; downward sloping D) upward sloping; horizontal E) downward sloping; horizontal
B) downward sloping; downward sloping
If output is increased in the long run, average production costs in the presence of internal economies of scale will \_\_\_\_\_\_\_\_, and in the presence of external economies of scale, will \_\_\_\_\_\_\_\_. A) increase; decrease B) increase; remain constant C) remain constant; increase D) decrease; decrease E) decrease; remain constant
D) decrease; decrease
If the firms in a market have constant returns to scale internally while there are external economies of scale for the industry, a firm's long-run supply curve will be \_\_\_\_\_\_\_\_ and the long-run market supply curve will be \_\_\_\_\_\_\_\_. A) downward sloping; downward sloping B) upward sloping; horizontal C) horizontal; downward sloping D) downward sloping; horizontal E) upward sloping; downward sloping
C) horizontal; downward sloping
If output is increased in the long run, then in the presence of internal economies of scale the number of firms will ________, and in the presence of constant external returns to scale the number of firms will ________.
A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant E) increase; decrease
C) remain constant; increase
