Ch. 8: Internal economies of scale

Question 1

A monopolistic firm
A) can sell as much as it wants for any price it determines in the market.
B) cannot sell additional quantity unless it raises the price on each unit.
C) chooses an output at which marginal revenue equals marginal cost.
D) cannot determine the price, which is determined by consumer demand.
E) will always earn a profit in the long run.

Answer 1

C) chooses an output at which marginal revenue equals marginal cost.

Question 2

Monopolistic competition is associated with
A) product differentiation.
B) price-taking behavior.
C) increasing returns to scale.
D) high profit margins in the long run.
E) explicit consideration at the firm level of the strategic impact of other firms’ pricing decisions.

Answer 2

A) product differentiation

Question 3

Modeling trade in imperfectly competitive industries is problematic because
A) collusion among imperfectly competitive firms makes usable data rare.
B) there is no single generally accepted model of behavior by imperfectly competitive firms. C) it is difficult to find an imperfectly competitive firm in the real world.
D) there is only a single model of imperfect competition (monopoly) but imperfect competition can take many forms in the real world.
E) there are no models of imperfectly competitive behavior.

Answer 3

B) there is no single generally accepted model of behavior by imperfectly competitive firms.

Question 4

When a country both exports and imports a type of commodity, the country is engaged in
A) inter-industry trade.
B) an attempt to monopolize the relevant industry.
C) increasing returns to scale.
D) intra-industry trade.
E) imperfect competition.

Answer 4

D) intra-industry trade.

Question 5

If there are a large number of firms in a monopolistically competitive industry
A) the country in which the firms are located can be expected to export the goods they produce. B) long-run profit will be equal to zero.
C) there will be a small number of firms that are very large and the rest will be very small.
D) the firms will converge production on a standardized product.
E) there will be barriers to entry that prevent additional firms from entering the industry.

Answer 5

B) long-run profit will be equal to zero.

Question 6

It is possible that trade based on external scale economies may leave a country worse off than it would have been without trade. Explain how this could happen.

Answer 6

One answer is that the terms of trade effects may dominate any other factors.

Question 7

If a firm increases its output in the \_\_\_\_\_\_\_\_ and unit costs \_\_\_\_\_\_\_\_, then the firm is experiencing \_\_\_\_\_\_\_\_ of scale.
A) long run; decrease; economies
B) long run; increase; economies
C) short run; decrease; diseconomies 
D) long run; decrease; diseconomies 
E) short run; decrease; economies

Answer 7

A) long run; decrease; economies

Question 8

If a firm increases its output in the \_\_\_\_\_\_\_\_ and unit costs \_\_\_\_\_\_\_\_, then the firm is experiencing \_\_\_\_\_\_\_\_ of scale.
A) short run; decrease; economies
B) long run; increase; diseconomies
C) short run; decrease; diseconomies 
D) long run; increase; economies
E) long run; decrease; diseconomies

Answer 8

B) long run; increase; diseconomies

Question 9

If a firm that uses a production process that yields economies of scale charges a price less than ________, then profit will be ________.
A) marginal cost; positive
B) average cost; negative
C) marginal revenue; positive D) marginal cost; maximized
E) marginal revenue; maximized

Answer 9

B) average cost; negative

Question 10

Firms that produce \_\_\_\_\_\_\_\_ products must be \_\_\_\_\_\_\_\_ competitive. 
A) differentiated; imperfectly
B) differentiated; perfectly
C) exported; imperfectly
D) standardized; imperfectly 
E) standardized; perfectly

Answer 10

A) differentiated; imperfectly

Question 11

Imperfectly competitive firms have a demand curve that ________ and a marginal revenue curve that ________ and is ________ the demand curve.
A) is horizontal; is horizontal; the same as
B) is horizontal; slopes downward; below
C) slopes downward; slopes downward; below
D) slopes downward; is horizontal; above
E) slopes downward; slopes downward; the same as

Answer 11

C) slopes downward; slopes downward; below

Question 12

An imperfectly competitive firm has the following demand curve: Q = 100 - 2P. What is marginal revenue equal to when P = 30?

Answer 12

Q = 40, so MR = 30 - (40/2) = 10.

Question 13

An imperfectly competitive firm has the following demand curve: Q = 100 - 2P. What is marginal revenue equal to when P = 40?

Answer 13

Q = 20, so MR = 40 - (20/2) = 30.

Question 14

An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is marginal cost equal to when Q = 10?

Answer 14

MC = 4 for any Q

Question 15

An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is total cost equal to when Q = 10?

Answer 15

C = 100 + (4)(10) = 140

Question 16

An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is average total cost equal to when Q = 10?

Answer 16

C/Q = [100 + (4)(10)]/10 = 14

Question 17

An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is average fixed cost equal to when Q = 10?

Answer 17

F/Q = 100/10 = 10

Question 18

Under oligopoly, firms' pricing policies are \_\_\_\_\_\_\_\_ and, under monopolistic competition, they are \_\_\_\_\_\_\_\_.
A) interdependent; independent
B) independent; interdependent
C) cooperative; uncooperative
D) uncooperative; cooperative
E) profit maximizing; revenue maximizing

Answer 18

A) interdependent; independent

Question 19

Under the model of monopolistic competition, a(an) \_\_\_\_\_\_\_\_ in the number of firms in the industry will cause \_\_\_\_\_\_\_\_ to \_\_\_\_\_\_\_\_.
A) increase; average price; decrease
B) increase; average price; increase
C) increase; average cost; decrease 
D) decrease; markup; decrease
E) increase; marginal cost; decrease

Answer 19

A) increase; average price; decrease

Question 20

Under the model of monopolistic competition, a(an) \_\_\_\_\_\_\_\_ in the number of firms in the industry will cause \_\_\_\_\_\_\_\_ to \_\_\_\_\_\_\_\_.
A) increase; markup; decrease
B) increase; average price; increase
C) increase; average cost; decrease 
D) decrease; markup; decrease
E) increase; marginal cost; decrease

Answer 20

A) increase; markup; decrease

Question 21

The simultaneous export and import of widgets by the United States is an example of
A) inter-industry trade.
B) imperfect competition.
C) the effect of a monopoly on international trade.
D) intra-industry trade.
E) increasing returns to scale.

Answer 21

D) intra-industry trade.

Question 22

Intra-industry trade is most common in the trade patterns of
A) raw material producers.
B) the developing countries of Asia and Africa.
C) labor-intensive products.
D) the industrial countries of Western Europe.
E) China with the rest of the world.

Answer 22

D) the industrial countries of Western Europe.

Question 23

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.
A) larger; fewer; more; higher
B) larger; more; less; higher 
C) larger; fewer; more; lower 
D) larger; more; more; lower 
E) larger; more; more; higher

Answer 23

D) larger; more; more; lower

Question 24

International trade based on external scale economies in both countries is likely to be carried out by
A) a large number of oligopolists in each country.
B) a relatively large number of price competing firms.
C) a relatively small number of price competing firms.
D) a relatively small number of imperfect competitors.
E) monopolists in each country.

Answer 24

B) a relatively large number of price competing firms.

Question 25

International trade based solely on internal scale economies in both countries is likely to be carried out by
A) a relatively small number of imperfect competitors.
B) a large number of oligopolists in each country.
C) monopolists in each country.
D) a relatively small number of price competing firms.
E) a relatively large number of price competing firms.

Answer 25

C) monopolists in each country.

Question 26

A monopoly firm engaged in international trade will
A) equate marginal costs with the highest price the market will bear.
B) equate average to local costs.
C) equate marginal costs with foreign marginal revenues.
D) equate marginal costs with marginal revenues in both domestic and foreign markets. E) equate marginal costs with the relative world prices.

Answer 26

D) equate marginal costs with marginal revenues in both domestic and foreign markets.

Question 27

A monopoly firm will maximize profits by producing where
A) total revenue from domestic and foreign sales is maximized. B) marginal revenue is the same in domestic and foreign markets.
C) prices are the same in domestic and foreign markets.
D) marginal revenue is higher in the domestic market.
E) marginal revenue is higher in foreign markets.

Answer 27

B) marginal revenue is the same in domestic and foreign markets.

Question 28

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
A) consumers in both countries would have more varieties and lower prices.
B) consumers in both countries would have higher prices and fewer varieties.
C) consumers in the exporting country only would have higher prices and fewer varieties.
D) consumers in both countries would have fewer varieties at lower prices.
E) consumers in the importing country only would have higher prices and fewer varieties.

Answer 28

A) consumers in both countries would have more varieties and lower prices.

Question 29

An industry is characterized by scale economies and exists in two countries. In order for consumers of its products to enjoy both lower prices and more variety of choice
A) the two countries must engage in international trade with each other.
B) each country’s marginal cost must equal that of the other country.
C) the monopoly must lower prices in order to sell more.
D) they must combine to become a multinational corporation.
E) the marginal cost of this industry must equal marginal revenue in the other.

Answer 29

A) the two countries must engage in international trade with each other.

Question 30

A product is produced in a monopolistically competitive industry with scale economies. If this industry exists in two countries, and these two countries engage in trade with each other, then we would expect
A) the country with a relative abundance of the factor of production in which production of the product is intensive will export this product.
B) the countries will trade only with other nations they are not in competition with.
C) the country in which the price of the product is lower will export the product.
D) neither country will export this product since there is no comparative advantage.
E) each country will export different varieties of the product to the other.

Answer 30

E) each country will export different varieties of the product to the other.

Question 31

Two countries engaged in trade in products with no scale economies, produced under conditions of perfect competition, are likely to be engaged in
A) Heckscher-Ohlin trade.
B) oligopolistic competition
C) monopolistic competition. 
D) intra-industry trade.
E) inter-industry trade.

Answer 31

E) inter-industry trade.

Question 32

Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in
A) immiserizing trade.
B) inter-industry trade.
C) intra-industry trade.
D) Heckscher-Ohlinean trade. E) price competition.

Answer 32

C) intra-industry trade.

Question 33

We often observe “pseudo-intra-industry trade” between the United States and Mexico. Actually, such trade is consistent with
A) the specific factors model of trade.
B) optimal tariff issues.
C) the Ricardian model of trade.
D) comparative advantage associated with Heckscher-Ohlin model.
E) oligopolistic markets.

Answer 33

D) comparative advantage associated with Heckscher-Ohlin model.

Question 34

Intra-industry trade will tend to dominate trade flows when which of the following exists?
A) large differences between relative country factor availabilities
B) small differences between relative country factor availabilities
C) uneven distribution of abundant resources between two countries
D) homogeneous products that cannot be differentiated
E) constant cost industries

Answer 34

B) small differences between relative country factor availabilities

Question 35

Trade without serious income distribution effects is most likely to happen
A) in simple manufactures trade between developing countries.
B) in sophisticated manufactures trade between rich countries.
C) in sophisticated manufactures trade between rich and poor countries.
D) in agricultural trade between rich countries.
E) in labor-intensive industries like clothing.

Answer 35

B) in sophisticated manufactures trade between rich countries.

Question 36

Imagine scale economies were not only external to firms, but were also external to individual countries. That is, the larger the worldwide industry (regardless of where firms or plants are located), the cheaper would be the per-unit cost of production. Describe what world trade would look like in this case.

Answer 36

Presumably each country would specialize in some component of the final product. This would result in in a high volume of intra-industry trade.

Question 37

(Fig. 1) Refer to above figure. The monopolist can export as much as it likes of its steel at the world price of $5/ton. How much steel will the monopolist sell, and at what price?

Answer 37

It would sell 10 million tons at $5/ton.

Question 38

(Fig. 1) Refer to above figure. Given the opportunity to sell at world prices, the marginal (opportunity) cost of selling a ton domestically is what?

Answer 38

$5/ton.

Question 39

(Fig. 1) Refer to above figure. While selling exports it would also maximize its domestic sales by equating its marginal (opportunity) cost to its marginal revenue of $5. How much steel would the firm sell domestically, and at what price?

Answer 39

4 million tons at $10/ton.

Question 40

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.
A) smaller; fewer; less; higher
B) smaller; fewer; less; lower 
C) smaller; more; less; lower 
D) smaller; more; less; higher 
E) smaller; fewer; more; higher

Answer 40

A) smaller; fewer; less; higher

Question 41

In an industry where firms experience internal scale economies, the long-run cost of production will depend on
A) individual firms’ fixed costs.
B) the size of the labor force.
C) whether the country engages in intra-industry trade. D) the size of the market.
E) whether the country engages in inter-industry trade.

Answer 41

D) the size of the market.

Question 42

In the model of monopolistic competition, if firms have \_\_\_\_\_\_\_\_ average cost curves, then opening trade will \_\_\_\_\_\_\_\_ the total number of firms and \_\_\_\_\_\_\_\_ the average price.
A) downward sloping; decrease; decrease
B) downward sloping; decrease; increase
C) upward sloping; decrease; increase 
D) downward sloping; increase; decrease 
E) upward sloping; increase; decrease

Answer 42

A) downward sloping; decrease; decrease

Question 43

In the model of monopolistic competition, if firms have ________ average cost curves, then opening trade will cause ________ firms to ________ the industry.
A) different; more efficient; enter
B) symmetric; less efficient; enter
C) different; less efficient; exit
D) symmetric; less efficient; exit E) symmetric; more efficient; enter

Answer 43

C) different; less efficient; exit

Question 44

In the model of monopolistic competition, compared to a firm with a higher marginal cost, a firm with a lower marginal cost will set a \_\_\_\_\_\_\_\_ price, produce \_\_\_\_\_\_\_\_ output, and earn \_\_\_\_\_\_\_\_ profits.
A) lower; less; less
B) higher; less; more 
C) lower; more; more 
D) higher; more; more 
E) higher; less; less

Answer 44

C) lower; more; more

Question 45

In the model of monopolistic competition, compared to a firm with a lower marginal cost, a firm with a higher marginal cost will set a \_\_\_\_\_\_\_\_ price, produce \_\_\_\_\_\_\_\_ output, and earn \_\_\_\_\_\_\_\_ profits.
A) higher; less; more
B) higher; less; less 
C) lower; less; less
D) lower; more; more 
E) higher; more; more

Answer 45

B) higher; less; less

Question 46

In the model of monopolistic competition, an increase in industry output will cause individual firms' demand curves to become \_\_\_\_\_\_\_\_, which will \_\_\_\_\_\_\_\_ demand for higher-priced goods and \_\_\_\_\_\_\_\_ demand for lower-priced goods.
A) steeper; reduce; increase
B) steeper; increase; reduce 
C) horizontal; reduce; reduce 
D) flatter; increase; reduce 
E) flatter; reduce; increase

Answer 46

E) flatter; reduce; increase

Question 47

In the model of monopolistic competition, an increase in industry output will ________
producers of higher-priced goods and ________ producers of lower-priced goods.
A) harm; benefit
B) benefit; benefit
C) benefit; harm
D) benefit; have no effect on
E) harm; harm

Answer 47

A) harm; benefit

Question 48

In the model of monopolistic competition, an increase in industry output will \_\_\_\_\_\_\_\_ market shares and \_\_\_\_\_\_\_\_ profits of producers of higher-priced goods and will \_\_\_\_\_\_\_\_ market shares and \_\_\_\_\_\_\_\_ profits of producers of lower-priced goods.
A) increase; reduce; increase; reduce
B) increase; increase; reduce; reduce 
C) reduce; increase; reduce; increase 
D) reduce; reduce; increase; increase 
E) reduce; increase; increase; reduce

Answer 48

D) reduce; reduce; increase; increase

Question 49

In the model of monopolistic competition, trade costs between countries will cause domestic and foreign markets to have ________ prices, ________ quantities sold, and ________ profit levels.
A) identical; identical; different
B) different; different; identical C) identical; different; identical D) different; different; different E) identical; different; different

Answer 49

D) different; different; different

Question 50

In the model of monopolistic competition, trade costs between countries cause
A) marginal costs of exported goods to exceed the marginal costs of goods sold domestically.
B) all firms that can earn a profit on domestic sales to export their goods at higher prices.
C) countries to negotiate the elimination of trade costs by mutual subsidization of trade.
D) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
E) all firms that can earn a profit on domestic sales to export their goods at lower prices.

Answer 50

A) marginal costs of exported goods to exceed the marginal costs of goods sold domestically.

Question 51

In the model of monopolistic competition, trade costs between countries cause
A) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
B) countries to negotiate the elimination of trade costs by mutual subsidization of trade.
C) prices of goods sold domestically to exceed the prices of exported goods.
D) some firms that can earn a profit on domestic sales to refrain from exporting their goods.
E) all firms that can earn a profit on domestic sales to export their goods at higher prices.

Answer 51

D) some firms that can earn a profit on domestic sales to refrain from exporting their goods.

Question 52

The most common form of price discrimination in international trade is
A) preferential trade arrangements.
B) non-tariff barriers.
C) product boycotts.
D) Voluntary Export Restraints. E) dumping.

Answer 52

E) dumping

Question 53

If an industry is imperfectly competitive, and markets are segmented then
A) a firm may find that it has lost its comparative advantage.
B) a firm may find that it should promote scale economies.
C) a firm may find that it is profitable to engage in dumping.
D) a firm may find that it should become more specialized.
E) a firm may find that international trade is unprofitable.

Answer 53

C) a firm may find that it is profitable to engage in dumping.

Question 54

Complaints are often made to the International Trade Commission concerning foreign “dumping” practices. These complaints typically claim that
A) foreign companies are charging prices that are lower than prices they charge countries other than the U.S.
B) foreign companies are charging exorbitant prices that are higher than the true value of the products.
C) U.S. consumers cannot differentiate between the foreign and domestic goods.
D) U.S. firms are harmed by the unfair pricing of foreign exporters.
E) U.S. consumers are harmed by the lack of quality control or health concerns in foreign countries.

Answer 54

D) U.S. firms are harmed by the unfair pricing of foreign exporters.

Question 55

(Fig. 2) The figure above represents the demand and cost functions facing a Brazilian steel producing monopolist. If it were unable to export, and was constrained by its domestic market, what quantity would it sell at what price?

Answer 55

It would sell 5 (million tons) at a price of $8/ton.

Question 56

(Fig 2) The figure above represents the demand and cost functions facing a Brazilian steel producing monopolist. The Brazilian firm is charging its foreign (U.S.) customers one half the price it is charging its domestic customers. Is this good or bad for the real income or economic welfare of the United States? Is the Brazilian firm engaged in dumping? Is this predatory behavior on the part of the Brazilian steel company?

Answer 56

It is good for U.S. customers.Yes, this is dumping if you define dumping as selling abroad at a price lower than domestically. No, it is not dumping if by dumping you mean selling below marginal cost. No, this is not predatory, since it is not being done in order to capture market share, but rather is “mere” static profit maximization behavior, as is expected of any self- respecting monopolist.

Question 57

A corporation is considered a multinational ________ if ________.
A) parent; more than 10% of its stock is held by a foreign company
B) child; more than 50% of its stock is held by a foreign company
C) monopolist; it owns more than 50% of a foreign firm
D) parent; it owns more than 10% of a foreign firm
E) child; more than 10% of its stock is held by a foreign company

Answer 57

D) parent; it owns more than 10% of a foreign firm

Question 58

A corporation is considered a multinational ________ if ________.
A) child; more than 50% of its stock is held by a foreign company
B) child; more than 10% of its stock is held by a foreign company
C) parent; more than 10% of its stock is held by a foreign company
D) affiliate; more than 10% of its stock is held by a foreign company
E) monopolist; it owns more than 50% of a foreign firm

Answer 58

D) affiliate; more than 10% of its stock is held by a foreign company

Question 59

Consider the following two cases. In the first, a U.S. firm purchases 18% of a foreign firm. In the second, a U.S. firm builds a new production facility in a foreign country. Both are ________, with the first referred to as ________ and the second as ________.
A) foreign direct investment (FDI); inflows; outflows
B) foreign direct investment (FDI) inflows; brownfield; greenfield
C) foreign direct investment (FDI) outflows; brownfield; greenfield
D) foreign direct investment (FDI) outflows; greenfield; brownfield
E) foreign direct investment (FDI) inflows; greenfield; brownfield

Answer 59

D) foreign direct investment (FDI) outflows; greenfield; brownfield

Question 60

When a multinational affiliate replicates production in a foreign country it is called \_\_\_\_\_\_\_\_ foreign direct investment.
A) bisectional
B) direct
C) horizontal
D) transitional 
E) vertical

Answer 60

C) horizontal

Question 61

When a multinational affiliate replicates elements of a production process in a foreign country it is called \_\_\_\_\_\_\_\_ foreign direct investment.
A) horizontal
B) vertical
C) transitional 
D) bisectional 
E) direct

Answer 61

B) vertical

Question 62

What is the nature of the proximity-concentration tradeoff that firms have to deal with then making decisions regarding foreign direct investment?

Answer 62

If the firm has numerous production facilities close to their various international markets, trade costs will be relatively low. However, when there are numerous production facilities, each will be relatively small, and opportunities for economies of scale will be foregone.

Question 63

A firm is more likely to engage in horizontal foreign direct investment if
A) trade costs are low and firms experience constant returns to scale in production.
B) trade costs are low and there are internal economies of scale.
C) trade costs are high and there are internal economies of scale.
D) trade costs are high and there are external economies of scale.
E) trade costs are low and there are external economies of scale.

Answer 63

C) trade costs are high and there are internal economies of scale.

Question 64

A firm's foreign direct investment. decisions are, in the case of horizontal FDI, strongly influenced by \_\_\_\_\_\_\_\_ and, in the case of vertical FDI, strongly influenced by \_\_\_\_\_\_\_\_. 
A) materials costs; labor costs
B) trade costs; production costs
C) labor costs; trade costs
D) production costs; trade costs
E) production costs; materials costs

Answer 64

B) trade costs; production costs

Question 65

Foreign outsourcing is
A) the transfer of operations to foreign contractors.
B) an example of foreign direct investment.
C) an example of internalization.
D) currently illegal in the U.S.
E) the substitution of immigration for foreign direct investment.

Answer 65

A) the transfer of operations to foreign contractors.

Question 66

During the past decade, U.S. imports of business services have \_\_\_\_\_\_\_\_, U.S. exports of business services have \_\_\_\_\_\_\_\_, and U.S. net exports of business services have \_\_\_\_\_\_\_\_. 
A) increased; decreased; decreased
B) decreased; increased; increased
C) decreased; decreased; increased 
D) increased; increased; increased 
E) increased; increased; not changed

Answer 66

D) increased; increased; increased

Question 67

What are the consequences of outsourcing production on the welfare of countries?

Answer 67

By taking advantage of cost differentials between countries, both countries can enjoy gains from trade. However, income distribution effects will result in winners and losers. Gains from trade are therefore thought of in terms of net gains in which the winners could compensate the losers and still be better off.

Question 68

Product differentiation and internal economies of scale yield gains from trade in the form of
A) higher profits and lower trade costs.
B) lower production costs and a greater variety of goods.
C) the proximity-concentration effect.
D) the substitution of immigration for foreign direct investment.
E) a proliferation of competitive firms.

Answer 68

B) lower production costs and a greater variety of goods.