International Economics, 10e (Krugman/Obstfeld/Melitz) Chapter Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises 8.1 The Theory of Imperfect Competition 1) A monopolistic firm A) will never sell a product whose demand is inelastic at the quantity sold B) can sell as much as it wants for any price it determines in the market C) cannot determine the price, which is determined by consumer demand D) cannot sell additional quantity unless it raises the price on each unit E) will always earn a profit in the long run Answer: A Page Ref: 166-168 Difficulty: Easy 2) Monopolistic competition is associated with A) product differentiation B) price-taking behavior C) explicit consideration at the firm level of the strategic impact of other firms' pricing decisions D) high profit margins in the long run E) increasing returns to scale Answer: A Page Ref: 169-173 Difficulty: Easy 3) Modeling trade in imperfectly competitive industries is problematic because A) there is no single generally accepted model of behavior by imperfectly competitive firms B) there are no models of imperfectly competitive behavior C) it is difficult to find an imperfectly competitive firm in the real world D) collusion among imperfectly competitive firms makes usable data rare E) there is only a single model of imperfect competition (monopoly) but imperfect competition can take many forms in the real world Answer: A Page Ref: 165-166 Difficulty: Easy 4) The simultaneous export and import of widgets by the United States is an example of A) intra-industry trade B) increasing returns to scale C) imperfect competition D) inter-industry trade E) the effect of a monopoly on international trade Answer: A Page Ref: 177-178 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 5) When a country both exports and imports a type of commodity, the country is engaged in A) intra-industry trade B) increasing returns to scale C) imperfect competition D) inter-industry trade E) an attempt to monopolize the relevant industry Answer: A Page Ref: 177-178 Difficulty: Easy 6) If there are a large number of firms in a monopolistically competitive industry A) long-run profit will be equal to zero B) the country in which the firms are located can be expected to export the goods they produce C) there will be barriers to entry that prevent addition firms from entering the industry D) the firms will converge production on a standardized product E) there will be a small number of firms that are very large and the rest will be very small Answer: A Page Ref: 170-172 Difficulty: Easy 7) 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 Page Ref: 177-178 Difficulty: Easy 8) If a firm increases its output in the and unit costs , then the firm is experiencing of scale A) long-run; decrease; economies B) short-run; decrease; economies C) long-run; decrease; diseconomies D) short-run; decrease; diseconomies E) long-run; increase; economies Answer: A Page Ref: 177-178 Difficulty: Easy 9) If a firm increases its output in the and unit costs , then the firm is experiencing of scale A) long-run; increase; diseconomies B) short-run; decrease; economies C) long-run; decrease; diseconomies D) short-run; decrease; diseconomies E) long-run; increase; economies Answer: A Page Ref: 177-178 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 10) If a firm that uses a production process that yields economies of scale charges a price equal to , then profit will be A) marginal cost; negative B) marginal revenue; maximized C) marginal cost; maximized D) marginal revenue; positive E) marginal cost; positive Answer: A Page Ref: 177-178 Difficulty: Moderate 11) Firms that produce products must be competitive A) differentiated; imperfectly B) differentiated; perfectly C) standardized; imperfectly D) standardized; perfectly E) exported; imperfectly Answer: A Page Ref: 177-178 Difficulty: Moderate 12) Imperfectly competitive firms have a demand curve that and a marginal revenue curve that and is the demand curve A) slopes downward; slopes downward; below B) is horizontal; is horizontal; the same as C) slopes downward; is horizontal; above D) is horizontal; slopes downward; below E) slopes downward; slopes downward; the same as Answer: A Page Ref: 177-178 Difficulty: Easy 13) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P What is marginal revenue equal to when P = 30? Answer: Q = 40, so MR = 30 - (40/2) = 10 Page Ref: 167 Difficulty: Moderate 14) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P What is marginal revenue equal to when P = 40? Answer: Q = 20, so MR = 40 - (20/2) = 30 Page Ref: 167 Difficulty: Moderate Copyright © 2015 Pearson Education, Inc 15) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q What is marginal cost equal to when Q = 10? Answer: MC = for any Q Page Ref: 167 Difficulty: Moderate 16) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q What is total cost equal to when Q = 10? Answer: C = 100 + (4)(10) = 140 Page Ref: 167 Difficulty: Moderate 17) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q What is average total cost equal to when Q = 10? Answer: C/Q = [100 + (4)(10)]/10 = 14 Page Ref: 167 Difficulty: Moderate 18) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q What is average fixed cost equal to when Q = 10? Answer: F/Q = 100/10 = 10 Page Ref: 167 Difficulty: Moderate 19) 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: A Page Ref: 168-172 Difficulty: Moderate 20) 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: A Page Ref: 168-172 Difficulty: Moderate Copyright © 2015 Pearson Education, Inc 21) 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: A Page Ref: 168-172 Difficulty: Moderate 8.2 Monopolistic Competition and Trade 1) Intra-industry trade is most common in the trade patterns of A) the industrial countries of Western Europe B) the developing countries of Asia and Africa C) raw material producers D) China with the rest of the world E) labor-intensive products Answer: A Page Ref: 179 Difficulty: Easy 2) 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; more; more; lower B) larger; fewer; more; lower C) larger; fewer; more; higher D) larger; more; more; higher E) larger; more; less; higher Answer: A Page Ref: 173-175 Difficulty: Easy 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) a relatively small number of price competing firms C) a relatively small number of imperfect competitors D) monopolists in each country E) a large number of oligopolists in each country Answer: A Page Ref: 173-178 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 4) International trade based solely on internal scale economies in both countries is likely to be carried out by A) monopolists 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) a large number of oligopolists in each country Answer: A Page Ref: 173-178 Difficulty: Easy 5) A monopoly firm engaged in international trade will A) equate marginal costs with marginal revenues in both domestic and foreign markets B) equate average to local costs C) equate marginal costs with foreign marginal revenues D) equate marginal costs with the highest price the market will bear E) equate marginal costs with the relative world prices Answer: A Page Ref: 173-178 Difficulty: Easy 6) A monopoly firm will maximize profits by producing where A) marginal revenue is the same in domestic and foreign markets B) prices are the same in domestic and foreign markets C) marginal revenue is higher in foreign markets D) marginal revenue is higher in the domestic market E) total revenue from domestic and foreign sales is maximized Answer: A Page Ref: 173-178 Difficulty: Moderate 7) A firm in long-run equilibrium under monopolistic competition will earn A) zero economic profits because of free entry B) positive monopoly profits because each sells a differentiated product C) positive oligopoly profits because each firm sells a differentiated product D) negative economic profits because it has economies of scale E) positive economic profit if it engages in international trade Answer: A Page Ref: 173-178 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 8) 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 importing country only would have higher prices and fewer varieties D) consumers in the exporting country only would have higher prices and fewer varieties E) consumers in both countries would have fewer varieties at lower prices Answer: A Page Ref: 173-178 Difficulty: Easy 9) 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 marginal cost of this industry must equal marginal revenue in the other D) the monopoly must lower prices in order to sell more E) they must combine to become a multinational corporation Answer: A Page Ref: 173-178 Difficulty: Moderate 10) 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) each country will export different varieties of the product to the other B) the country in which the price of the product is lower will export the product C) the country with a relative abundance of the factor of production in which production of the product is intensive will export this product D) neither country will export this product since there is no comparative advantage E) the countries will trade only with other nations they are not in competition with Answer: A Page Ref: 173-178 Difficulty: Easy 11) Two countries engaged in trade in products with no scale economies, produced under conditions of perfect competition, are likely to be engaged in A) inter-industry trade B) monopolistic competition C) intra-industry trade D) Heckscher-Ohlin trade E) oligopolistic competition Answer: A Page Ref: 173-178 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 12) Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in A) intra-industry trade B) price competition C) inter-industry trade D) Heckscher-Ohlinean trade E) immiserizing trade Answer: A Page Ref: 173-178 Difficulty: Easy 13) We often observe "pseudo-intra-industry trade" between the United States and Mexico Actually, such trade is consistent with A) comparative advantage associated with Heckscher-Ohlin model B) oligopolistic markets C) optimal tariff issues D) the Ricardian model of trade E) the specific factors model of trade Answer: A Page Ref: 173-178 Difficulty: Easy 14) Intra-industry trade will tend to dominate trade flows when which of the following exists? A) small differences between relative country factor availabilities B) large differences between relative country factor availabilities C) homogeneous products that cannot be differentiated D) constant cost industries E) uneven distribution of abundant resources between two countries Answer: A Page Ref: 173-178 Difficulty: Easy 15) Trade without serious income distribution effects is most likely to happen A) in sophisticated manufactures trade between rich countries B) in simple manufactures trade between developing 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: A Page Ref: 173-178 Difficulty: Moderate Copyright © 2015 Pearson Education, Inc 16) 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: Presumably each country would specialize in some component of the final product This would result in in a high volume of intra-industry trade Page Ref: 173-178 Difficulty: Difficult 17) 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: It would sell 10 million tons at $5/ton Page Ref: 173-178 Difficulty: Moderate 18) Refer to above figure Given the opportunity to sell at world prices, the marginal (opportunity) cost of selling a ton domestically is what? Answer: $5/ton Page Ref: 173-178 Difficulty: Easy 19) 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: million tons at $10/ton Page Ref: 173-178 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 20) 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; more; less; higher C) smaller; more; less; lower D) smaller; fewer; less; lower E) smaller; fewer; more; higher Answer: A Page Ref: 173-178 Difficulty: Easy 21) In an industry where firms experience internal scale economies, the long-run cost of production will depend on A) the size of the market B) the size of the labor force C) whether the country engages in intra-industry trade D) individual firms' fixed costs E) whether the country engages in inter-industry trade Answer: A Page Ref: 177-178 Difficulty: Easy 8.3 Firm Responses to Trade: Winners, Losers, and Industry Performance 1) 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) downward sloping; increase; decrease D) upward sloping; decrease; increase E) upward sloping; increase; decrease Answer: A Page Ref: 181-185 Difficulty: Moderate 2) In the model of monopolistic competition, if firms have average cost curves, then opening trade will cause firms to the industry A) different; less efficient; exit B) different; more efficient; enter C) symmetric; less efficient; exit D) symmetric; more efficient; enter E) symmetric; less efficient; enter Answer: A Page Ref: 181-185 Difficulty: Easy 10 Copyright © 2015 Pearson Education, Inc 3) 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; more; more B) higher; more; more C) lower; less; less D) higher; less; less E) higher; less; more Answer: A Page Ref: 181-185 Difficulty: Easy 4) 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; less B) lower; more; more C) higher; more; more D) lower; less; less E) higher; less; more Answer: A Page Ref: 181-185 Difficulty: Easy 5) 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) flatter; reduce; increase B) steeper; reduce; increase C) flatter; increase; reduce D) steeper; increase; reduce E) horizontal; reduce; reduce Answer: A Page Ref: 181-185 Difficulty: Easy 6) 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; harm C) harm; harm D) benefit; benefit E) benefit; have no effect on Answer: A Page Ref: 181-185 Difficulty: Easy 11 Copyright © 2015 Pearson Education, Inc 7) 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) reduce; reduce; increase; increase B) increase; increase; reduce; reduce C) increase; reduce; increase; reduce D) reduce; increase; reduce; increase E) reduce; increase; increase; reduce Answer: A Page Ref: 181-185 Difficulty: Easy 8.4 Trade Costs and Export Decisions 1) 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) different; different; different B) identical; different; different C) different; different; identical D) identical; different; identical E) identical; identical; different Answer: A Page Ref: 185-187 Difficulty: Easy 2) 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) marginal costs of goods sold domestically to exceed the marginal costs of exported goods C) all firms that can earn a profit on domestic sales to export their goods at lower prices D) all firms that can earn a profit on domestic sales to export their goods at higher prices E) countries to negotiate the elimination of trade costs by mutual subsidization of trade Answer: A Page Ref: 185-187 Difficulty: Easy 3) In the model of monopolistic competition, trade costs between countries cause A) some firms that can earn a profit on domestic sales to refrain from exporting their goods B) prices of goods sold domestically to exceed the prices of exported goods C) marginal costs of goods sold domestically to exceed the marginal costs of exported goods D) all firms that can earn a profit on domestic sales to export their goods at higher prices E) countries to negotiate the elimination of trade costs by mutual subsidization of trade Answer: A Page Ref: 185-187 Difficulty: Easy 12 Copyright © 2015 Pearson Education, Inc 8.5 Dumping 1) The most common form of price discrimination in international trade is A) dumping B) non-tariff barriers C) Voluntary Export Restraints D) preferential trade arrangements E) product boycotts Answer: A Page Ref: 188-190 Difficulty: Easy 2) If an industry is imperfectly competitive, and markets are segmented then A) a firm may find that it is profitable to engage in dumping B) a firm may find that international trade is unprofitable C) a firm may find that it should promote scale economies D) a firm may find that it has lost its comparative advantage E) a firm may find that it should become more specialized Answer: A Page Ref: 188-190 Difficulty: Easy 3) Complaints are often made to the International Trade Commission concerning foreign "dumping" practices These complaints typically claim that A) U.S firms are harmed by the unfair pricing of foreign exporters B) foreign companies are charging exorbitant prices that are higher than the true value of the products C) foreign companies are charging prices that are lower than prices they charge countries other than the U.S D) U.S consumers are harmed by the lack of quality control or health concerns in foreign countries E) U.S consumers cannot differentiate between the foreign and domestic goods Answer: A Page Ref: 188-190 Difficulty: Easy 13 Copyright © 2015 Pearson Education, Inc 4) 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: It would sell (million tons) at a price of $8/ton Page Ref: 188-190 Difficulty: Moderate 5) 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: 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 selfrespecting monopolist Page Ref: 188-190 Difficulty: Moderate 8.6 Multinationals and Outsourcing 1) A corporation is considered a multinational if A) parent; it owns more than 10% of a foreign firm B) parent; more than 10% of its stock is held by a foreign company C) child; more than 10% of its stock is held by a foreign company D) child; more than 50% of its stock is held by a foreign company E) monopolist; it owns more than 50% of a foreign firm Answer: A Page Ref: 190-194 Difficulty: Easy 14 Copyright © 2015 Pearson Education, Inc 2) A corporation is considered a multinational if A) affiliate; more than 10% of its stock is held by a foreign company B) parent; more than 10% of its stock is held by a foreign company C) child; more than 10% of its stock is held by a foreign company D) child; more than 50% of its stock is held by a foreign company E) monopolist; it owns more than 50% of a foreign firm Answer: A Page Ref: 190-194 Difficulty: Easy 3) 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) outflows; greenfield; brownfield B) foreign direct investment (FDI) inflows; greenfield; brownfield C) foreign direct investment (FDI) outflows; brownfield; greenfield D) foreign direct investment (FDI) inflows; brownfield; greenfield E) foreign direct investment (FDI); inflows; outflows Answer: A Page Ref: 190-194 Difficulty: Moderate 4) When a multinational affiliate replicates production in a foreign country it is called foreign direct investment A) horizontal B) vertical C) transitional D) bisectional E) direct Answer: A Page Ref: 190-194 Difficulty: Easy 5) When a multinational affiliate replicates elements of a production process in a foreign country it is called foreign direct investment A) vertical B) horizontal C) transitional D) bisectional E) direct Answer: A Page Ref: 190-194 Difficulty: Easy 15 Copyright © 2015 Pearson Education, Inc 6) What is the nature of the proximity-concentration tradeoff that firms have to deal with then making decisions regarding foreign direct investment? Answer: 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 Page Ref: 190-194 Difficulty: Moderate 7) Foreign outsourcing is A) the transfer of operations to foreign contractors B) an example of internalization C) an example of foreign direct investment D) currently illegal in the U.S E) the substitution of immigration for foreign direct investment Answer: A Page Ref: 190-194 Difficulty: Moderate 8.7 The Firm's Decision Regarding Foreign Direct Investment 1) A firm is more likely to engage in horizontal foreign direct investment if A) trade costs are high and there are internal economies of scale B) trade costs are low and there are internal economies of scale C) trade costs are high and there are external economies of scale D) trade costs are low and there are external economies of scale E) trade costs are low and firms experience constant returns to scale in production Answer: A Page Ref: 194-197 Difficulty: Easy 2) 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) trade costs; production costs B) materials costs; labor costs C) production costs; materials costs D) production costs; trade costs E) labor costs; trade costs Answer: A Page Ref: 194-197 Difficulty: Easy 16 Copyright © 2015 Pearson Education, Inc 3) 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; increased; increased B) increased; decreased; decreased C) decreased; increased; increased D) increased; increased; not changed E) decreased; decreased; increased Answer: A Page Ref: 197-199 Difficulty: Moderate 4) What are the consequences of outsourcing production on the welfare of countries? Answer: 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 Page Ref: 199-200 Difficulty: Moderate 5) Product differentiation and internal economies of scale yield gains from trade in the form of A) lower production costs and a greater variety of goods B) higher profits and lower trade costs C) the proximity-concentration effect D) a proliferation of competitive firms E) the substitution of immigration for foreign direct investment Answer: A Page Ref: 199-200 Difficulty: Moderate 17 Copyright © 2015 Pearson Education, Inc ... of trade Answer: A Page Ref: 185 - 187 Difficulty: Easy 12 Copyright © 2015 Pearson Education, Inc 8. 5 Dumping 1) The most common form of price discrimination in international trade is A) dumping... increase; reduce; increase E) reduce; increase; increase; reduce Answer: A Page Ref: 181 - 185 Difficulty: Easy 8. 4 Trade Costs and Export Decisions 1) In the model of monopolistic competition, trade... positive economic profit if it engages in international trade Answer: A Page Ref: 173-1 78 Difficulty: Easy Copyright © 2015 Pearson Education, Inc 8) An industry is characterized by scale economies,