International Trade Theory And Policy 10th Edition By Krugman – Test Bank A+

Description

6.1 A Standard Model of a Trading Economy

1) The meaning of “terms of trade” is

1. A) the price of a country’s exports divided by the price of its imports.
2. B) the amount of exports sold by a country.
3. C) the price conditions bargained for in international markets.
4. D) the quantities of imports received in free trade.
5. E) the tariffs in place between two trading countries.

Answer: A

Page Ref: 119

Difficulty: Easy

2) A country cannot produce a mix of products with a higher value than where

1. A) the isovalue line is tangent to the production possibility frontier.
2. B) the isovalue line intersects the production possibility frontier.
3. C) the isovalue line is above the production possibility frontier.
4. D) the isovalue line is below the production possibility frontier.
5. E) the isovalue line is tangent with the indifference curve.

Answer: A

Page Ref: 120

Difficulty: Easy

3) Tastes of individuals are represented by

1. A) indifference curves.
2. B) production possibility frontiers.
3. C) isovalue lines.
4. D) production functions.
5. E) the terms of trade.

Answer: A

Page Ref: 121

Difficulty: Easy

4) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then

1. A) the terms of trade of cloth exporters will improve.
2. B) all countries would be better off.
3. C) the terms of trade of food exporters will improve.
4. D) the terms of trade of all countries will improve.
5. E) the terms of trade of cloth exporters will worsen.

Answer: A

Page Ref: 120

Difficulty: Easy

5) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then

1. A) the cloth exporter will increase the quantity of cloth produced.
2. B) the cloth exporter will increase the quantity of cloth exported.
3. C) the food exporter will increase the quantity of food exported.
4. D) the cloth exporter will decrease the quantity of cloth exported.
5. E) the country would import more cloth.

Answer: A

Page Ref: 123

Difficulty: Easy

6) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then

1. A) world relative quantity of cloth supplied will increase.
2. B) world relative quantity of cloth supplied and demanded will increase.
3. C) world relative quantity of cloth supplied and demanded will decrease.
4. D) world relative quantity of cloth demanded will decrease.
5. E) world relative quantity of food will increase.

Answer: A

Page Ref: 123

Difficulty: Easy

7) A country will be able to consume a combination of goods that is not attainable solely from domestic production if

1. A) the world terms of trade differ from its domestic relative costs.
2. B) the country specializes in one product.
3. C) the country avoids international trade.
4. D) the world terms of trade equal the domestic relative costs.
5. E) the country’s domestic production value equals world relative value.

Answer: A

Page Ref: 125

Difficulty: Moderate

8) Terms of trade refers to

1. A) the relative price at which trade occurs.
2. B) what goods are imported.
3. C) what goods are exported.
4. D) the volume of trade.
5. E) the tariffs applied to trade.

Answer: A

Page Ref: 119

Difficulty: Easy

9) If points A and B are two locations on a country’s production possibility frontier, then

1. A) the country could produce either of the two bundles.
2. B) consumers are indifferent between the two bundles.
3. C) producers are indifferent between the two bundles.
4. D) at any point in time, the country could produce both.
5. E) both bundles must have the same relative cost.

Answer: A

Page Ref: 119

Difficulty: Easy

10) If the economy is producing at point a on its production possibility frontier, then

1. A) all of the country’s workers are employed.
2. B) all of the country’s workers are specialized in one product.
3. C) all of the country’s capital is used for one product.
4. D) all of its capital is used, but not efficiently.
5. E) all of the country’s exports are produced in equal amounts.

Answer: A

Page Ref: 119-120

Difficulty: Easy

11) Refer to the figure above, which shows a country’s possible production possibility frontiers and indifference curves. If the country is producing at ________, then moving to ________ will cause utility to ________.

1. A) point b; point c; remain unchanged
2. B) point a; point b; increase
3. C) point c; point b; increase
4. D) point c; point b; decrease
5. E) point a; point c; remain unchanged

Answer: A

Page Ref: 121-122

Difficulty: Easy

12) If two countries with diminishing returns and different marginal rates of substitution between two products were to engage in trade, then

1. A) the marginal rates of substitution of both would become equal.
2. B) the shapes of their respective production possibility frontiers would change.
3. C) the larger of the two countries would dominate their trade.
4. D) the country with relatively elastic supplies would export more.
5. E) the opportunity costs for the smaller country would increase.

Answer: A

Page Ref: 125

Difficulty: Easy

13) If a country began exporting product A and importing product B, then, as compared to the autarky (no-trade) situation, the marginal cost of product A will

1. A) increase.
2. B) decrease.
3. C) shift outward.
4. D) shift inward.
5. E) remain the same.

Answer: A

Page Ref: 123

Difficulty: Easy

14) When the production possibility frontier shifts out relatively more in one direction, we have

1. A) biased growth.
2. B) unbiased growth.
3. C) immiserizing growth.
4. D) balanced growth.
5. E) imbalanced growth.

Answer: A

Page Ref: 126

Difficulty: Easy

15) Suppose that a country experiences growth strongly biased toward its export, cloth

1. A) this will tend to worsen the country’s terms of trade.
2. B) this will tend to improve the country’s terms of trade.
3. C) this will tend to leave the country’s terms of trade unchanged.
4. D) this will tend to worsen the terms of trade for the country’s trading partner.
5. E) this will increase the price of cloth relative to the imported good.

Answer: A

Page Ref: 126

Difficulty: Moderate

16) Suppose that a “small country” experiences growth strongly biased toward its export, cloth

1. A) this will have no effect on terms of trade for the country’s trading partner.
2. B) this will tend to worsen the country’s terms of trade.
3. C) this will tend to improve the country’s terms of trade.
4. D) this will tend to worsen terms of trade for the country’s trading partner.
5. E) this will tend to improve terms of trade for the country’s trading partner.

Answer: A

Page Ref: 129

Difficulty: Moderate

17) Other things being equal, a rise in a country’s terms of trade increases its welfare. What would happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?

Answer: Let us assume that the terms of trade (or technically the net commodity terms of trade) improve, thus the relative price of a country’s exports increase. This would, logically, lead to a shift away by world consumers to substitute goods. If the demand for a country’s exports is elastic, the quantity decrease would be proportionally larger than the per unit price increase. This term of trade effect would actually lower the country’s real income and economic welfare.

Page Ref: 129

Difficulty: Moderate

18) Refer to above figure. Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it would choose to produce at which point in the diagram above? Suppose the PA/PB at point a was equal to 1. Given this information, in which good (A or B) does Albania enjoy a comparative advantage?

Now that the Cold War is over, Albania is interested in obtaining economic welfare gains from trade. The relevant international relative price is PA/PB = 2. Albania would therefore choose to produce at which point (a, b, or c)? Given this additional information, in which good does Albania enjoy a comparative advantage?

Answer: Albania would choose to produce at point a. With no reference to world terms of trade, one cannot establish Albania’s comparative advantage.

Later, when Albania discovers that the relative price of A equals twice the price of B, it knows that it has a comparative advantage in A. Therefore Albania would produce at production point b.

Page Ref: 121-123

Difficulty: Moderate

19) Refer to above figure. Now, suppose that the relative price of A is actually not higher than Albania’s autarkic level of 1, but quite the opposite (e.g., PA/PB = 0.5). Would Albania still be able to gain from trade? If so, where would be its production point? Given the information in this question, where is Albania’s comparative advantage?

Answer: Yes. As long as the world’s terms of trade differed from those of Albania, that country stands to gain from international trade. In this particular case, its point of production with trade would be at point c.

Page Ref: 121-123

Difficulty: Moderate

20) Refer to the figure above, which shows a country’s possible production possibility frontiers and indifference curves. If the country is producing at ________, then moving to ________ will cause utility to ________.

1. A) point c; point b; remain unchanged
2. B) point a; point b; increase
3. C) point c; point b; increase
4. D) point c; point b; decrease
5. E) point a; point c; remain unchanged

Answer: A

Page Ref: 121-123

Difficulty: Easy

21) Refer to the figure above, which shows a country’s possible production possibility frontiers and indifference curves. If the country is producing at ________, then moving to ________ will cause utility to ________.

1. A) point b; point a; increase
2. B) point a; point b; increase
3. C) point c; point b; increase
4. D) point c; point b; decrease
5. E) point a; point c; remain unchanged

Answer: A

Page Ref: 121-123

Difficulty: Easy

6.2 Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD

1) If the U.S. (a large country) imposes a tariff on its imported good, this will tend to

1. A) improve the terms of trade of the United States.
2. B) have no effect on terms of trade.
3. C) improve the terms of trade of all countries.
4. D) cause a deterioration of U.S. terms of trade.
5. E) raise the world price of the good imported by the United States.

Answer: A

Page Ref: 132-133

Difficulty: Easy

2) If Slovenia is a small country in world trade terms, then if it imposes a large series of tariffs on many of its imports, this would

1. A) have no effect on its terms of trade.
2. B) improve its terms of trade.
3. C) deteriorate its terms of trade.
4. D) decrease its marginal propensity to consume.
5. E) increase its exports.

Answer: A

Page Ref: 132-133

Difficulty: Easy

3) If Slovenia is a large country in world trade, then if it imposes a large set of tariffs on many of its imports, this would

1. A) improve its terms of trade.
2. B) have no effect on its terms of trade.
3. C) harm its terms of trade.
4. D) decrease its marginal propensity to consume.
5. E) increase its exports.

Answer: A

Page Ref: 132-135

Difficulty: Easy

4) If Slovenia were a large country in world trade, then if it imposes a large set of tariffs on its imports, this must

1. A) decrease the internal price of imports below the world market rate.
2. B) cause retaliation on the part of its trade partners.
3. C) harm Slovenia’s real income.
4. D) improve Slovenia’s real income.
5. E) improve the real income of its trade partners.

Answer: A

Page Ref: 132-135

Difficulty: Easy

5) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, this must

1. A) harm its terms of trade.
2. B) have no effect on its terms of trade.
3. C) improve its terms of trade.
4. D) decrease its marginal propensity to consume.
5. E) harm world terms of trade.

Answer: A

Page Ref: 132-135

Difficulty: Easy

6) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, this must

1. A) improve the real income of its trade partners.
2. B) cause retaliation on the part of its trade partners.
3. C) harm Slovenia’s real income.
4. D) improve Slovenia’s real income.
5. E) increase internal prices above the world market rate.

Answer: A

Page Ref: 132-135

Difficulty: Easy

7) An export subsidy has the opposite effect on terms of trade to the effect of an import tariff. Domestically a tariff will raise the price of the import good, deteriorating the domestic terms of trade. A production subsidy for the export product will lower the local price of the export good, lowering the domestic terms of trade for the country. Hence the export subsidy and the import tariff have the same effect. This analysis seems to contradict the first sentence in this paragraph. Discuss this paradox.

Answer: While this (Lerner) equivalence may well occur domestically, internationally the tariff will improve a country’s terms of trade. An export subsidy on the other hand will in fact lower the international price of the (now readily available) export good, hence hurting a country’s terms of trade.

Page Ref: 132-135

Difficulty: Moderate

8) Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania’s economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point c, would you consider this growth to be export-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania’s terms of trade? Its real income?

Answer: If point c is the production point with trade, then Albania has a comparative advantage in good B. Therefore, from the shape of the new production possibility frontier (as compared to the original one), this is clearly an export-biased growth. This ceteris paribus would tend to worsen Albania’s terms of trade. The terms of trade effect would, again ceteris paribus, worsen its real income. However, the growth itself acts in the opposite direction.

Page Ref: 132-135

Difficulty: Moderate

9) Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania’s economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point b, would you consider this growth to be export-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania’s terms of trade? Its real income? What if Albania were a small country?

Answer: If the production with trade point was point b, then the observed growth is a case of import-biased growth, and would improve Albania’s terms of trade. If Albania were a small country, the world’s terms of trade would not change at all. In such a case, economic growth (with no induced change in income distributions) would always increase its real income.

Page Ref: 132-135

Difficulty: Moderate

10) Suppose Albania is exporting product B, and experienced economic growth biased in favor of product B as seen in the figure above. We are also told that Albania’s new consumption point is at point d. Would you still consider the economic growth, which took place biased in favor of B? If Albania were a large country how would this growth affect its terms of trade?

Answer: This is a relatively difficult case. On the one hand, the growth is still technically export biased. However, Albania’s consumption clearly shifted in favor of its import product, A. In this case, the deterioration in the terms of trade would be much more pronounced than before, and may lead to a case of immiserizing growth. However, for this to occur, there must have been a major shift in the taste patterns (the old community indifference map is not longer applicable). Therefore, when we try to judge the direction and magnitude of the welfare change, we are comparing the old versus new taste preferences, which raises the classic index number problem.

Page Ref: 132-135

Difficulty: Difficult

11) If a small country were to levy a tariff on its imports then this would

1. A) decrease the country’s economic welfare.
2. B) have no effect on that country’s economic welfare.
3. C) increase the country’s economic welfare.
4. D) change the terms of trade.
5. E) raise prices on its exports in other countries.

Answer: A

Page Ref: 132-135

Difficulty: Easy

12) An increase in a country’s net commodity terms of trade will

1. A) not always guarantee positive changes in the country’s economy.
2. B) always increase the country’s economic welfare.
3. C) always increase the country’s real income.
4. D) never increase the country’s quantity of exports.
5. E) always increase the country’s production of its import competing good.

Answer: A

Page Ref: 132-135

Difficulty: Easy

13) An import tariff will cause the relative demand for ________ to ________ and the relative supply for ________ to ________.

1. A) imports; decrease; imports; increase
2. B) imports; increase; imports; decrease
3. C) exports; increase; exports; decrease
4. D) exports; decrease; exports; increase
5. E) exports; increase; imports; decrease

Answer: A

Page Ref: 132-135

Difficulty: Moderate

14) An export subsidy will cause the relative demand for ________ to ________ and the relative supply for ________ to ________.

1. A) exports; decrease; exports; increase
2. B) imports; decrease; imports; increase
3. C) imports; increase; imports; decrease
4. D) exports; increase; exports; decrease
5. E) exports; increase; imports; decrease

Answer: A

Page Ref: 132-135

Difficulty: Moderate

15) An import tariff will cause the terms of trade of the ________ country to ________ and will ________ the country.

1. A) importing; improve; benefit
2. B) exporting; improve; benefit
3. C) importing; suffer; harm
4. D) exporting; improve; harm
5. E) importing; improve; harm

Answer: A

Page Ref: 132-135

Difficulty: Moderate

16) An export subsidy will cause the terms of trade of the ________ country to ________ and will ________ the country.

1. A) exporting; suffer; harm
2. B) exporting; improve; benefit
3. C) importing; suffer; harm
4. D) importing; suffer; benefit
5. E) importing; improve; harm

Answer: A

Page Ref: 132-135

Difficulty: Moderate

6.3 International Borrowing and Lending

1) International borrowing and lending may be interpreted as one form of

1. A) intertemporal trade.
2. B) intermediate trade.
3. C) trade in services.
4. D) unrequited international transfers.
5. E) aid to offset trade advantages.

Answer: A

Page Ref: 135-136

Difficulty: Easy

2) If one observes that Japan was traditionally a net foreign lender, one could conclude that relative to its international trade and financial partners

1. A) Japan’s intertemporal production possibilities are biased toward present consumption.
2. B) Japan’s intertemporal production possibilities are biased toward future consumption.
3. C) Japan’s intertemporal production possibilities are larger than that of the other countries.
4. D) Japan’s intertemporal production possibilities are not biased.
5. E) Japan preferred to consume beyond its production in the present.

Answer: A

Page Ref: 135-136

Difficulty: Easy

3) Rapidly growing developing countries tend to be borrowers on the international capital markets. From this information we may surmise that they have a comparative advantage in

1. A) future income.
2. B) capital goods.
3. C) disposable income.
4. D) consumer goods.
5. E) present income.

Answer: A

Page Ref: 135-136

Difficulty: Easy

4) It may be argued that theoretically, international capital movements

1. A) tend to hurt labor in donor countries.
2. B) tend to hurt the donor countries.
3. C) tend to hurt the recipient countries.
4. D) tend to hurt labor in recipient countries.
5. E) increase future production in donor countries.

Answer: A

Page Ref: 135-136

Difficulty: Moderate

5) The intertemporal tradeoff between present and future consumption is measured by the

1. A) real interest rate.
2. B) inflation rate.
3. C) nominal interest rate.
4. D) terms of trade.
5. E) rate of economic growth.

Answer: A

Page Ref: 136-37

Difficulty: Easy

6) A fall in the real interest rate, all other things held constant, will cause a country’s ________ to ________.

1. A) current consumption: increase
2. B) current consumption: decrease
3. C) terms of trade; improve
4. D) terms of trade; worsen
5. E) welfare level; improve

Answer: A

Page Ref: 136-37

Difficulty: Easy

7) An increase in the real interest rate, all other things held constant, will cause a country’s ________ to ________.

1. A) current consumption: increase
2. B) current consumption: decrease
3. C) terms of trade; improve
4. D) terms of trade; worsen
5. E) welfare level; improve

Answer: B

Page Ref: 136-37

Difficulty: Easy

8) What is intertemporal comparative advantage?

Answer: Intertemporal comparative advantage arises when a country can produce goods for future consumption at a relatively low cost in terms of current consumption. Such a country can import investments (loans) from other countries with intertemporal comparative disadvantages at terms of trade that benefit both countries.

Page Ref: 138

Difficulty: Moderate

6.4 Appendix to Chapter 6: More on Intertemporal Trade

1) The price of ________ consumption in terms of ________ consumption is ________.

1. A) future; current; 1/(1 + r)
2. B) present; future; 1/(1 + r)
3. C) future; current; r
4. D) present; future; r
5. E) future; current; 1 + r

Answer: A

Page Ref: 142

Difficulty: Easy

2) The intertemporal budget constraint is defined as:

1. A) DP+ DF/(1 + r) = QP+ QF/(1 + r)
2. B) V = QP+ QF/(1 + r)
3. C) V = DP+ DF/(1 + r)
4. D) DF+ DP/(1 + r) = QF+ QP/(1 + r)
5. E) DP+ DF(1 + r) = QP+ QF(1 + r)

Answer: A

Page Ref: 143

Difficulty: Easy

3) Describe the nature of trade between two countries based on intertemporal comparative advantage.

Answer: Intertemporal comparative advantage arises when a country can produce goods for future consumption at a relatively low cost in terms of current consumption when compared with its trading partner. This implies that the first country offers a relatively high return on investment when compared to the second. As a result, the first country will import goods for current consumption (investments or loans) and will export goods for future consumption (return on investment or interest). The resulting pattern of trade is one which will tend to equalize returns on investment in the two countries.

Page Ref: 143-144

Difficulty: Moderate

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 7 External Economies of Scale and the International Location of Production

7.1 Economies of Scale and International Trade: An Overview

1) If a firm’s output more than doubles when all inputs are doubled, production is said to occur under conditions of

1. A) increasing returns to scale.
2. B) imperfect competition.
3. C) intra-industry equilibrium.
4. D) constant returns to scale
5. E) decreasing returns to scale.

Answer: A

Page Ref: 146-147

Difficulty: Easy

2) One advantage of the specialization that results from international trade is that countries can take advantage of

1. A) scale economies.
2. B) production diversification
3. C) smaller countries.
4. D) taste reversals.
5. E) lower transport costs.

Answer: A

Page Ref: 146-147

Difficulty: Moderate

3) 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.

Page Ref: 146-147

Difficulty: Difficult

4) If a firm’s output doubles when all inputs are doubled, production is said to occur under conditions of

1. A) increasing returns to scale.
2. B) imperfect competition.
3. C) intra-industry equilibrium.
4. D) constant returns to scale
5. E) decreasing returns to scale.

Answer: D

Page Ref: 146-147

Difficulty: Easy

5) If a firm’s output less than doubles when all inputs are doubled, production is said to occur under conditions of

1. A) increasing returns to scale.
2. B) imperfect competition.
3. C) intra-industry equilibrium.
4. D) constant returns to scale
5. E) decreasing returns to scale.

Answer: E

Page Ref: 146-147

Difficulty: Easy

7.2 Economies of Scale and Market Structure

1) The existence of external economies of scale

1. A) may be associated with a perfectly competitive industry.
2. B) cannot be associated with a perfectly competitive industry.
3. C) tends to result in one huge monopoly.
4. D) tends to result in large profits for each firm.
5. E) focuses more on individual firms than the industry as a whole.

Answer: A

Page Ref: 147-148

Difficulty: Moderate

2) The existence of internal economies of scale

1. A) cannot be associated with a perfectly competitive industry.
2. B) may be associated with a perfectly competitive industry.
3. C) is associated only with sophisticated products such as aircraft.
4. D) cannot form the basis for international trade.
5. E) focuses more on the industry than individual firms.

Answer: A

Page Ref: 147-148

Difficulty: Moderate

3) When there are external economies of scale, an increase in the size of the market will

1. A) increase the number of firms and lower the price per unit.
2. B) increase the number of firms and raise the price per unit.
3. C) decrease the number of firms and raise the price per unit.
4. D) decrease the number of firms and lower the price per unit.
5. E) not affect the number of firms, but will lower the price per unit.

Answer: A

Page Ref: 147-148

Difficulty: Easy

4) If some industries exhibit internal increasing returns to scale in each country, we should not expect to see

1. A) perfect competition in these industries.
2. B) intra-industry trade between countries.
3. C) inter-industry trade between countries.
4. D) high levels of specialization in both countries.
5. E) increased productivity in both countries.

Answer: A

Page Ref: 147-148

Difficulty: Moderate

5) 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.

Answer: 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.

Page Ref: 147-148

Difficulty: Difficult

6) External economies of scale arise when the cost per unit

1. A) falls as the industry grows larger and rises as the average firm grows larger.
2. B) rises as the industry grows larger and falls as the average firm grows larger.
3. C) falls as the industry and the average firm grows larger.
4. D) remains constant over a broad range of output.
5. E) rises as the industry and the average firm grows larger.

Answer: A

Page Ref: 147-148

Difficulty: Easy

7) Internal economies of scale arise when the cost per unit

1. A) falls as the average firm grows larger.
2. B) rises as the industry grows larger.
3. C) falls as the industry grows larger.
4. D) rises as the average firm grows larger.
5. E) remains constant over a broad range of output.

Answer: A

Page Ref: 147-148

Difficulty: Easy

8) Where there are internal economies of scale, the scale of production possible in a country is constrained by

1. A) the size of the domestic plus the foreign market.
2. B) the size of the country.
3. C) the size of the trading partner’s country.
4. D) the size of the domestic market.
5. E) the size of the foreign market.

Answer: A

Page Ref: 147-148

Difficulty: Easy

9) Internal economies of scale will ________ average cost when output is ________ by ________.

1. A) reduce; increased; a firm
2. B) increase; increased; a firm
3. C) reduce; increased; the industry
4. D) increase; increased; the industry
5. E) reduce; reduce; the industry

Answer: A

Page Ref: 147-148

Difficulty: Moderate

10) 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?

Answer: Because once one firm will 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.

Page Ref: 147-148

Difficulty: Moderate

11) 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?

Answer: Yes. If the scale economies were external to the firm, then there is no reason why the firms may not be in perfect competition.

Page Ref: 147-148

Difficulty: Moderate

12) External economies of scale will ________ average cost when output is ________ by ________.

1. A) reduce; increased; the industry
2. B) reduce; increased; a firm
3. C) increase; increased; a firm
4. D) increase; increased; the industry
5. E) reduce; reduce; the industry

Answer: A

Page Ref: 147-148

Difficulty: Moderate

7.3 The Theory of External Economies

1) What is meant by an “industrial district” and what are the three main sources of the economic advantages derived from locating in such a district?

Answer: An industrial community 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.

Page Ref: 148-151

Difficulty: Moderate

2) External economies of scale often arise because similar firms

1. A) locate in the same geographic region.
2. B) collude to fix prices and increase profits.
3. C) have excellent internal logistics.
4. D) agree to cooperate to expand global trade.
5. E) have economies of scale in production.

Answer: A

Page Ref: 148-151

Difficulty: Easy

3) 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

1. A) external economies of scale.
2. B) internal economies of scale.
3. C) consolidation of industries into a small number of powerful firms.
4. D) suppression of innovations and collusive behavior, driving up prices.
5. E) government intervention and regulation.

Answer: A

Page Ref: 148-151

Difficulty: Moderate

4) 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 ________.

1. A) downward sloping; downward sloping
2. B) upward sloping; horizontal
3. C) horizontal; upward sloping
4. D) downward sloping; horizontal
5. E) upward sloping; downward sloping

Answer: A

Page Ref: 148-151

Difficulty: Easy

5) 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 ________.

1. A) decrease; decrease
2. B) increase; remain constant
3. C) remain constant; increase
4. D) decrease; remain constant
5. E) increase; decrease

Answer: A

Page Ref: 148-151

Difficulty: Easy

6) 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 ________.

1. A) downward sloping; downward sloping
2. B) upward sloping; horizontal
3. C) horizontal; downward sloping
4. D) downward sloping; horizontal
5. E) upward sloping; downward sloping

Answer: C

Page Ref: 148-151

Difficulty: Easy

7) 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 ________.

1. A) decrease; decrease
2. B) increase; remain constant
3. C) remain constant; increase
4. D) decrease; remain constant
5. E) increase; decrease

Answer: C

Page Ref: 148-151

Difficulty: Easy

8) If output is increased in the long-run, average production costs in the presence of internal diseconomies of scale will ________, and in the presence of external diseconomies of scale, will ________.

1. A) decrease; decrease
2. B) increase; remain constant
3. C) remain constant; increase
4. D) decrease; remain constant
5. E) increase; decrease

Answer: C

Page Ref: 148-151

Difficulty: Easy

7.4 External Economies and International Trade

1) If two countries begin trade and both produce a product subject to external economies of scale, then the country with the ________ rate of production will ________ production until it controls ________ of the market.

1. A) higher; increase; 100%
2. B) higher; increase; 50%
3. C) lower; increase; 100%
4. D) lower; increase; 50%
5. E) higher; decrease; 0%

Answer: A

Page Ref: 152-158

Difficulty: Easy

2) Explain why positive economies of scale in one (of two) sectors may establish a comparative advantage for the large (as compared to the small) country in the production of the commodity which exhibits positive scale economies.

Answer: In the case of the H-O model, the actual size of the country is irrelevant in the determination of the direction of trade (though it may affect the equilibrium terms of trade). When positive scale economies apply to the production of one product, the country that can devote more resources (in absolute terms) will be able to sell that product cheaper, and therefore will be more likely to gain a “revealed” comparative advantage in that product. This will be the country with more factors (both labor and capital)-the larger country.

Page Ref: 152-158

Difficulty: Difficult

3) In the presence of external economies of scale, trade

1. A) may or may not improve welfare in both countries.
2. B) will unambiguously improves welfare in both countries.
3. C) will unambiguously worsens welfare in both countries.
4. D) will unambiguously worsen welfare in the exporting country and improve welfare in the importing country.
5. E) will unambiguously improve welfare in the exporting country and worsen welfare in the importing country.

Answer: A

Page Ref: 152-158

Difficulty: Moderate

4) A learning curve relates ________ to ________ and is a case of ________ returns.

1. A) unit cost; cumulative production; dynamic increasing returns
2. B) output per time period; long-run marginal cost; dynamic increasing returns
3. C) unit cost; cumulative production; dynamic decreasing returns
4. D) output per time period; long-run marginal cost; dynamic decreasing returns
5. E) labor productivity; education; increasing marginal returns

Answer: A

Page Ref: 152-158

Difficulty: Easy

5) The learning curve describes the ________ relationship between ________ and ________.

1. A) inverse; unit cost; cumulative output
2. B) direct; unit cost; cumulative output
3. C) inverse; education; annual income
4. D) direct; education; annual income
5. E) direct; education; labor productivity

Answer: A

Page Ref: 152-158

Difficulty: Easy

6) If two countries begin trade and both produce a product subject to internal economies of scale, then the country with the ________ rate of production will ________ production until it controls ________ of the market.

1. A) higher; increase; 100%
2. B) higher; increase; 50%
3. C) lower; increase; 100%
4. D) lower; increase; 50%
5. E) higher; decrease; 0%

Answer: A

Page Ref: 152-158

Difficulty: Easy

7) Suppose that two countries, A and B, employ the same technology in the production of a good. External economies of scale apply in both countries. Analyze the effects of trade on long-run production levels if country A has a comparatively lower cost of production when trade begins.

Answer: Initially, country B will have a comparative advantage in production of the good. Over time, as production shifts to Country B, costs will decline there while increasing in country A. In the absence of market intervention, country B will have a monopoly. Note that no individual firm will have a monopoly unless internal economies of scale also apply.

Page Ref: 152-158

Difficulty: Moderate

7.5 Interregional Trade and Economic Geography

1) Restaurant meals are an example of a ________ good and clothing is an example of a ________ good. The pattern of interregional trade is determined primarily by ________.

1. A) nontraded; traded; external economies.
2. B) traded; nontraded; internal economies
3. C) nondurable; durable; natural resource
4. D) durable; nondurable; natural resources
5. E) consumer; style; population

Answer: A

Page Ref: 158-161

Difficulty: Easy

2) The share of ________ goods in employment is ________ across the country. The share of ________ goods in employment is ________ across the country.

1. A) nontraded; uniform; traded; variable
2. B) traded; uniform; nontraded; variable
3. C) durable; uniform; nondurable; variable
4. D) nondurable; uniform; durable; variable
5. E) nontraded; variable; traded; uniform

Answer: A

Page Ref: 158-161

Difficulty: Moderate

3) Patterns of interregional trade are primarily determined by ________ rather than ________ because factors of production are generally ________.

1. A) external economies; natural resources; mobile
2. B) internal economies; external economies; mobile
3. C) external economies; population; immobile
4. D) internal economies; population; immobile
5. E) population; external economies; immobile

Answer: A

Page Ref: 158-161

Difficulty: Easy

4) The primary determinant of patterns of interregional trade is

1. A) accidents of history.
2. B) resource allocations.
3. C) factor abundance.
4. D) weather.
5. E) centralized optimization.

Answer: A

Page Ref: 158-161

Difficulty: Easy

5) The study of factors that influence both international and interregional trade is referred to as

1. A) accidents of history.
2. B) economic geography.
3. C) factor abundance theory.
4. D) weather analysis.
5. E) centralized optimization.

Answer: B

Page Ref: 158-161

Difficulty: Easy