ch06

International Economics, 8e (Krugman)

Chapter 6

Economies of Scale, Imperfect Competition, and International Trade

6.1

Economies of Scale and International Trade: An Overview

1)

External economies of scale arise when the cost per unit

A)

rises as the industry grows larger.

B)

falls as the industry grows larger rises as the average firm grows larger.

C)

falls as the average firm grows larger.

D)

remains constant.

E)

None of the above.

Answer:

B

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2)

Internal economies of scale arise when the cost per unit

A)

rises as the industry grows larger.

B)

falls as the industry grows larger.

C)

rises as the average firm grows larger.

D)

falls as the average firm grows larger.

E)

None of the above.

Answer:

D

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3)

Where there are 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 trading partner's country.

C)

the size of the domestic market.

D)

the size of the domestic plus the foreign market.

E)

None of the above.

Answer:

D

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4)

If output more 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 trade.

D)

inter

-

industry trade.

E)

None of the above.

Answer:

A

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5)

History and accident determine the details of trade involving

A)

Ricardian and Classical comparative advantage.

B)

Heckscher

-

Ohlin model consideration.

C)

taste reversals.

D)

scale economies.

E)

None of the above.

Answer:

D

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6)

We often observe intra

-

industry North

-

South trade in

A)

classification and aggregation ambiguities.

B)

monopolistic competition.

C)

specific factors issues.

D)

scale economies.

E)

None of the above.

Answer:

A

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7)

Why is it that if an industry were operating under conditions of domestic internal scale economies (applies to

firm in the country)

-

then the resultant equilibrium cannot be consistent with the pure competition model?

Answer:

Because once one firm became bigger than another, or if one firm began the industry, then no other

firm would be able to match its per unit cost, so that they would be driven out of the industry.

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8)

Is it possible that if positive scale economies characterize an industry, that its equilibrium may be consistent

with purely competitive conditions? Explain how this could happen.

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.

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9)

Why are increasing returns to scale and fixed costs important in models of international trade and

monopolistic 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

(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

-

ant e

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

-

way trade,

-

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.

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6.2

Economies of Scale and Market Structure

1)

External economies of scale

A)

may be associated with a perfectly competitive industry.

B)

cannot be associated with a perfectly competitive industry.

C)

tends to result in one huge monopoly.

D)

tends to result in large profits for each firm.

E)

None of the above.

Answer:

A

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2)

Internal economies of scale

A)

may be associated with a perfectly competitive industry.

B)

cannot be associated with a perfectly competitive industry.

C)

are associated only with sophisticated products such as aircraft.

D)

cannot form the basis for international trade.

E)

None of the above.

Answer:

B

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3)

Where there are economies of scale, an increase in the size of the market will

A)

increase the number of firms and raise the price per unit.

B)

decrease the number of firms and raise the price per unit.

C)

increase the number of firms and lower the price per unit.

D)

decrease the number of firms and lower the price per unit.

E)

None of the above.

Answer:

C

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4)

If some industries exhibit internal (firm specific) increasing returns to scale in each country, we should not

expect to see

A)

intra

-

industry trade between countries.

B)

perfect competition in these industries.

C)

inter

-

industry trade between countries.

D)

high levels of specialization in both countries.

E)

None of the above.

Answer:

B

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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.

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6.3

The Theory of Imperfect Competition

1)

A monopolistic firm

A)

can sell as much as it wants for any price it determines in the market.

B)

cannot determine the price, which is determined by consumer demand.

C)

will never sell a product whose demand is inelastic at the quantity sold.

D)

cannot sell additional quantity unless it raises the price on each unit.

E)

None of the above.

Answer:

C

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2)

Monopolistic competition is associated with

A)

cut

-

throat price competition.

B)

product differentiation.

C)

explicit consideration at firm level of the feedback effects of other firms' pricing decisions.

D)

high profit margins.

E)

None of the above.

Answer:

B

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3)

Modeling trade in monopolistic industries is problematic because

A)

there is no one generally accepted model of oligopoly behavior.

B)

there are no models of oligopoly behavior.

C)

it is difficult to find an oligopoly in the real world.

D)

collusion among oligopolists makes usable data rare.

E)

None of the above.

Answer:

A

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4)

The simultaneous export and import of widgets by the United States is an example of

A)

increasing returns to scale.

B)

imperfect competition.

C)

intra

-

industry trade.

D)

inter

-

industry trade.

E)

None of the above.

Answer:

C

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5)

Intra

-

industry trade can be explained in part by

A)

transportation costs within and between countries.

B)

problems of data aggregation and categorization.

C)

increasing returns to scale.

D)

All of the above.

E)

None of the above.

Answer:

D

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6)

The larger the number of firms in a monopolistic competition situation,

A)

the larger are that country's exports.

B)

the higher is the price charged.

C)

the fewer varieties are sold.

D)

the lower is the price charged.

E)

None of the above.

Answer:

D

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7)

In industries in which there are scale economies, the variety of goods that a country can produce is

constrained by

A)

the size of the labor force.

B)

anti

-

trust legislation.

C)

the size of the market.

D)

the fixed cost.

E)

None of the above.

Answer:

C

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8)

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:

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

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6.4

Monopolistic Competition and Trade

1)

Intra

-

industry trade is most common in the trade patterns of

A)

developing countries of Asia and Africa.

B)

industrial countries of Western Europe.

C)

all countries.

D)

North

-

South trade.

E)

None of the above.

Answer:

B

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2)

International trade based on scale economies is likely to be associated with

A)

Ricardian comparative advantage.

B)

comparative advantage associated with Heckscher

-

Ohlin factor

-

proportions.

C)

comparative advantage based on quality and service.

D)

comparative advantage based on diminishing returns.

E)

None of the above.

Answer:

E

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3)

International trade based on external scale economies in both countries is likely to be carried out by a

A)

relatively large number of price competing firms.

B)

relatively small number of price competing firms.

C)

relatively small number of competing oligopolists.

D)

monopoly firms in each country/industry.

E)

None of the above.

Answer:

A

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4)

International trade based solely on internal scale economies in both countries is likely to be carried out by a

A)

relatively large number of price competing firms.

B)

relatively small number of price competing firms.

C)

relatively small number of competing oligopolists.

D)

monopoly firms in each country/industry.

E)

None of the above.

Answer:

D

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