Test 2

Question 1

Explain the Melitz model

Answer 1

The Melitz (2003) is a model of firm-level within-industry heterogeneity. In this model, firm’s individuality is represented with a firm-specific productivity parameter. As a result of fixed costs to both production and exporting, the most productive firms export, the next most productive firms sell in the domestic market, and the least productive firms shut down.
The main difference between the Melitz model and the other models we have studied (e.g. Ricardian, HO, and specific factors) is that the other models assume within-industry homogeneity. That is, all the firms are assumed to be identical. Trade is therefore explained by differences across industries (such as differences in autarky prices and factor intensity or technology).

Question 2

If x represents exports and m represents imports, the intra-industry trade index is closest to

Answer 2

1- (x-m/x+m)

Question 3

Which of the following is NOT a characteristic of monopolistic competition?

a. positive economic profits
b. many firms
c. free entry
d. lots of varieties of a given product

Answer 3

a. positive economic profits

Question 4

Which of the following best describes “economies of scale?”

a. falling average total costs and very small marginal costs
b. the production of machines that measure weight
c. production of many varieties of a good
d. government sanctioned monopolistic control over telecommunications

Answer 4

a. falling average total costs and very small marginal costs

Question 5

In which of the following market structures would a firm have the most control over the price at which it sells its product?

a. monopolistic competition
b. monopoly
c. oligopoly
d. perfect competition

Answer 5

b. monopoly

Question 6

In which of the following market structures is strategic trade policy most likely to be relevant?

a. monopolistic competition
b. perfect competition
c. oligopoly
d. monopoly

Answer 6

c. oligopoly

Question 7

Which of the following market structures explains intra-industry trade between similar developed countries?

a. oligopoly
b. monopolistic competition
c. monopoly
d. perfect competition

Answer 7

b. monopolistic competition

Question 8

Why is monopolistic competition featured prominently in an introduction to the global economy?

a. most global trade is intra-industry
b. most global trade is inter-industry
c. the professor’s dissertation was on monopolistic competition
d. monopolistic competition explains why there are so many different kinds of cars

Answer 8

a. most global trade is intra-industry

Question 9

The idea that consumers value having lots of product choices is represented in which of the following models?

a. ideal variety model
b. ricardian model
c. love of variety model
d. specific factors model

Answer 9

c. love of variety model

Question 10

Rising tensions between the U.S. and China is causing some firms in China to set up production facilities in neighboring countries, like Vietnam. This behavior is an example of

a. offshoring
b. outsourcing
c. offshore outsourcing
d. reshoring

Answer 10

a. offshoring

Question 11

According to Wikipedia, all Russian oil trunk pipelines (except Caspian Pipeline Consortium (Links to an external site.)) are owned and operated by the state-owned company Transneft (Links to an external site.) and all oil products pipeline are owned and operated by its subsidiary Transnefteproduct (Links to an external site.). In this case, economic theory would predict that Transnefteproduct would probably

a. produce the quantity at which the market price is equal to marginal cost
b. price below cost to drive other firms out of business
c. charge the Cournot equilibrium price
d. earn positive economic profits

Answer 11

d. earn positive economic profits

Question 12

The profit maximizing rule for optimal quantity produced in perfect competition is to choose the output quantity at which

a. marginal revenue is equal to the marginal cost
b. marginal revenue is equal to the marginal product
c. marginal revenue is equal to price
d. marginal revenue product is equal to the wage

Answer 12

a. marginal revenue is equal to the marginal cost

Question 13

The main difference between the “Melitz” model and the Heckscher-Ohlin model is that

a. firms in the Melitz model produce at the point where marginal revenue equals marginal cost
b. there are big and small firms in the Melitz model but not in the Hecksher-Ohlin model
c. productivity explains gains from trade
d. exports are larger in the Melitz model

Answer 13

b. there are big and small firms in the Melitz model but not in the Hecksher-Ohlin model

Question 14

Which of the following models produces results that most consistent with the results of the gravity model?

a. monopolistic competition
b. hecksher ohlin
c. ricardian
d. standard trade

Answer 14

a. monopolistic competition

Question 15

The Melitz model predicts that reducing export costs will

a. cause less productive firms to start
b. increase wage inequality
c. benefit capital and hurt workers
d. increase utility

Answer 15

a. cause less productive firms to start

Question 16

Oats, the delicious cereal grain used to make Cheerios and Quaker Oat Squares, are produced by farmers who’s market structure is most like

a. monopoly
b. monopolistic competition
c. perfect competition
d. oligopoly

Answer 16

c. perfect competition

Question 17

The prisoner’s dilemma would be most effective to describe competition in which of the following market structures?

a. monopoly
b. oligopoly
c. perfect competition
d. monopolistic competition

Answer 17

b. oligopoly

Question 18

Which of the following is MOST likely to generate positive economic profits?

a. bertrand oligopoly
b. perfect competition
c. monopolistic competition
d. cournot oligopoly

Answer 18

d. cournot oligopoly

Question 19

What is the best way to evaluate whether or not the tariffs hurt a country as intended?

Answer 19

Calculate the change in tariff revenue before and after the tariff

Question 20

When a small country imposes tariffs, which of the following amounts would be the largest?

a. tariff revenue
b. dead weight loss
c. loss to consumer surplus
d. transfer to domestic producers from domestic consumers

Answer 20

c. loss to consumer surplus

Question 21

Producers in small countries are often effective at getting trade protection because

a. per person gains to producers are more than per person losses to consumers
b. the gains to producers from protection increase national welfare
c. they outnumber consumers
d. tariffs protect national security

Answer 21

a. per person gains to producers are more than per person losses to consumers

Question 22

The World Trade Organization is a multilateral organization in which countries come together to agree on trading rules and to negotiate lowering tariffs. The models that we have discussed in class this week imply that the reason the WTO was founded is because:

Answer 22

reducing tariffs almost always increases national welfare

Question 23

What is the Leontief paradox?

Answer 23

in the 60s and 70s, most trade was between US and Europe and they are similar so the high amount of trade was weird b/c ricardian and HO say that different countries should trade the most
so to explain why most trade was between similar countries, we needed New Trade theory - which is connected w/ the gravity model

Question 24

Perfect Competition

Answer 24

Infinite small firms
no power over price
products are identical/homogeneous (milk, oil, wheat, cotton)
market determines the price

Question 25

Monopoly

Answer 25

One firm
complete power over price (limited by demand)
maximize profit at MR=MC

Question 26

Types of Tariffs

Answer 26

Ad Valorem: related to the value of the product; a % tax on the value
Specific: an amount per unit

Question 27

Non Tariff Barriers

Answer 27

administrative standards
specifications (lead paint)
quotas (quantity restrictions)

Question 28

Temporary Trade Barriers

Answer 28

counter veiling duties (make sure you don’t have unfair trade practices - countering a tariff w/a tariff)
Anti dumping duties (predatory pricing/drive prices low to drive out competition and monopolize)
Safeguards (if too many of one type of good is coming in it will lower price, so they intentionally help the quantity stay low and the price stay high)

Question 29

Bertrand Oligopoly

Answer 29

firms compete in prices (firms with the lowest price captures the entire market)

Question 30

Cournot Oligopoly

Answer 30

firms compete in quantities

Question 31

Define “Economies of Scale” and give two examples.

Answer 31

A proportionate saving in costs gained by an increased level of production. The average cost per unit of output decreases with an increase in scale/magnitude of the output being produced by a firm.
If you produce bread, one worker will take a lot of time to make very expensive bread, but if you have a factory, you can produce a lot more at a lower cost (covers fixed costs)
Twilight at different locations vs at the same - movie is cheaper at a single location

Question 32

How do firms decide how much to produce?

Answer 32

In perfect competition, firms produce where MC=Marginal Revenue

Question 33

Explain the difference in the profit-maximizing rule for perfectly competitive firms and monopolists.

Answer 33

In perfect competition, firms produce @ P=MR

In monopolies, the firm IS the market and they will produce @ MR=MC

Question 34

Explain the difference between total costs, marginal costs, variable costs, and fixed costs.

Answer 34

Total Costs: total expenses of producing @ current levels
Marginal Costs: cost of producing one additional unit
Variable Costs: the things that change with output
Fixed Costs: cost of rent, starting a business, not impacted by the type of good you produce