Practice Multiple Choice Questions Chapters 5 and 6: Increasing Returns to Scale in Production and International Trade

1. 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

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

3.

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 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

4.

5.

Where there are economies of scale, the scale of production possible in a country (engaged in international trade) is constrained by

A. B. C. D. E.

the size of the country. the size of the trading partner's country. the size of the domestic market. the size of the domestic plus the foreign market. None of the above.

Answer: D 6. 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 7. 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 8. 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 9. 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 10. 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. C. D. E.

perfect competition in these industries. inter-industry trade between countries. high levels of specialization in both countries. None of the above.

Answer: B 11. 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 12. 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 13. 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 14. 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 15. A monopoly firm engaged in international trade will A. equate average to local costs. B. equate marginal costs with foreign marginal revenues.

C. D. E.

equate marginal costs with the highest price the market will bear. equate marginal costs with marginal revenues in both domestic and in foreign markets. None of the above.

Answer: D

16.

A monopoly firm will maximize profits by A. charging the same price in domestic and in foreign markets. B. producing where the marginal revenue is higher in foreign markets. C. producing where the marginal revenue is higher in the domestic market. D. equating the marginal revenues in domestic and foreign markets. E. None of the above. Answer: D

17.

A firm in monopolistic competition A. earns positive monopoly profits because each sells a differentiated product. B. earns positive oligopoly profits because each firm sells a differentiated product. C. earns zero economic profits because it is in perfectly or pure competition. D. earns zero economic profits because of free entry. E. None of the above. Answer: D

18.

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

19.

The monopolistic competition model is one in which there is/are A. a monopoly. B. perfect competition. C. economies of scale. D. government intervention in the market. E. None of the above. Answer: C

20.

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. D. E.

the size of the market. the fixed cost. None of the above.

Answer: C 21. 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 suffer higher prices and fewer varieties. B. consumers in the importing country would suffer higher prices and fewer varieties. C. consumers in the exporting country would suffer higher prices and fewer varieties. D. consumers in both countries would enjoy fewer varieties available but lower prices. E. None of the above. Answer: E 22. 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. each country's marginal cost must equal that of the other country. B. the marginal cost of this industry must equal marginal revenue in the other. C. the monopoly must lower prices in order to sell more. D. the two countries must engage in international trade one with the other. E. None of the above. Answer: D 23. 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 one with the other, then we would expect A. the country in which the price of the product is lower will export the product. B. the country with a relative abundance of the factor of production in which production of the product is intensive will export this product. C. each of the countries will export different varieties of the product to the other. D. neither country will export this product since there is no comparative advantage. E. None of the above. Answer: C 24. The reason why one country may export a product which is produced with positive scale economies is A. its labor productivity will tend to be higher. B. it enjoys a relative abundance of the factor intensely used in the product's production. C. its demand is biased in favor of the product. D. its demand is biased against the product. E. None of the above. Answer: E

25.

Two countries engaged in trade in products with no scale economies, produced under conditions of perfect competition, are likely to be engaged in A. monopolistic competition. B. inter-industry trade. C. intra-industry trade. D. Heckscher-Ohlin trade. E. None of the above. Answer: B

26.

Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in A. price competition. B. inter-industry trade. C. intra-industry trade. D. Heckscher-Ohlinean trade. E. None of the above. Answer: C

27.

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

28.

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. Homogeneous products that cannot be differentiated D. Constant cost industries E. None of the above. Answer: B

29.

The most common form of price discrimination in international trade is A. non-tariff barriers. B. Voluntary Export Restraints. C. dumping. D. preferential trade arrangements. E. None of the above.

Answer: C 30. Two countries H and F have identical production functions for two goods, A and B. The production function for each good exhibits increasing returns to scale. The two goods have identical capital-labor ratios (the relative intensity of factor use for A is identical to that of B) and the two countries have identical endowments of factors or production. Which of the following are true: A. Trade between A and B will be beneficial and based on comparative advantage B. Trade between A and B will be based on the IRS and larger benefits will be derived form a larger size of the market C. Trade between A and B will be based on different relative productivities and the pattern of trade will not be determined D. The pattern of trade between A and B will not be determined from the model. E. Both b. and d. Answer: E 31. Consider the same two countries in question 30 above with IRS technology, but now assume that good A is relatively capital intensive, B is relatively labor intensive, and country F is relatively labor abundant. In this case, A. In free trade, the pattern of trade will be determined based on comparative advantage B. The benefits of free trade in this case will depend only on IRS technology and the size of the market C. Each of the two countries will specialize in production (of only one good) D. Both a. and c. E. All of the above (a., b., and c.) Answer: D Questions 32-34 below pertain to the following information:

Country H produces beer with a monopolistically competitive market. The AC = P and MR = MC relationships for a typical firm are as follows: P = c + (F/S) * n P = c + 1/(bn) Where, F = $100,000 S = 2,560,000 bottles of beer; b = 0.1; c = $2

32. In autarky, the variety of beer brands in country H is: A. 16 B. 15 C. 18

D. 12 Answer: A 33. The average price of a bottle of beer is: A. $2.252 B. $3 C. $1.55 D. $2.625 E. None of the above Answer: D

34. The average cost of a bottle of beer produced by a single firm in H A. Rises as output of beer increases B. Falls as output of beer increases C. Stays the same (i.e., does not change) as output of beer increases D. Rises at first and then falls as output of beer increases.

Answer: B 35. For a firm engaged in persistent dumping, production, and sales at home and abroad take place where: A. MC = MRdomestic + MRforeign B. MRdomestic = -MRforeign C. MCforeign = MCdomestic D. MC = MRdomestic = MRforeign E. None of the above Answer: D