Deck 9: International Factor Movements and Multinational Enterprises

Question 1

Multinational enterprises may provide benefits to their source (home) countries because they may:

A) Secure raw materials for the $\underline { \text { source } }$ country
B) Shift source country technology overseas via licensing
C) Export products which reflect source-country comparative disadvantage
D) Result in lower wages for source-country workers

Answer 1

Secure raw materials for the $\underline { \text { source } }$ country

Question 2

All of the following are potential advantages of an international joint venture $\underline { \text { except } }$

A) Sharing research and development costs among corporations
B) Forestalling protectionism against imports
C) Establishing work rules promoting higher labor productivity
D) Operating at diseconomy-of-scale output levels

Answer 2

Operating at diseconomy-of-scale output levels

Question 3

Which of the following is $\underline { \text { not } }$ a significant motive for the formation of multinational enterprises?

A) Avoiding tariffs by obtaining foreign manufacturing facilities
B) Obtaining the benefits from overseas comparative advantages
C) The acquisition of natural resource supply sources
D) Subsidies granted by the home government to overseas corporations

Answer 3

Subsidies granted by the home government to overseas corporations

Question 4

Which of the following $\underline { \text { best } }$ refers to the outright construction or purchase abroad of productive facilities, such as manufacturing plants, by domestic residents?

A) Direct investment
B) Portfolio investment
C) Short-term capital investment
D) Long-term capital investment

Question 5

In recent years, the $\underline { \text { largest } }$ amount of U.S. direct investment abroad has occurred in:

A) Central America
B) South America
C) Europe
D) Japan

Question 6

The source (home) location of most of the world's leading multinational enterprises is:

A) North America and Europe
B) North America and Asia
C) Europe and South America
D) Europe and Asia

Question 7

$\underline { \text { most } }$ U.S. direct investment abroad occurs in:

A) Communications
B) Petroleum
C) Finance and insurance
D) Manufacturing

Question 8

Which of the following would $\underline { \text { best } }$ explain why foreign direct investment might be attracted to the United States?

A) U.S. price ceilings that hold down the price of energy
B) U.S. wage rates exceeding the productivity of U.S. labor
C) Artificially high prices being charged for the stock of U.S. firms
D) Anticipations of future reductions in U.S. tariff levels

Question 9

Direct foreign investment has taken all of the following forms $\underline { \text { except } }$

A) Investors buying bonds of an existing firm overseas
B) The creation of a wholly owned business enterprise overseas
C) The takeover of an existing company overseas
D) The construction of a manufacturing plant overseas

Question 10

In recent years, $\underline { \text { most } }$ foreign direct investment in the United States has come from:

A) Western Europe
B) Central America
C) South America
D) Asia

Question 11

Both Coca-Cola Co. and Pepsi-Cola Co. are multinational firms in that their soft drinks are bottled throughout the world. This practice illustrates:

A) Backward vertical integration
B) Forward vertical integration
C) Horizontal integration
D) Conglomerate integration

Question 12

Suppose that a steel manufacturer headquartered in Japan sets up a subsidiary in Canada to produce steel. This practice is referred to as:

A) Conglomerate integration
B) Forward vertical integration
C) Backward vertical integration
D) Horizontal integration

Question 13

$\underline { \text { most } }$ foreign direct investment in the United States occurs in:

A) Public utilities
B) Communications
C) Manufacturing
D) Mining and smelting

Question 14

Trade analysis involving multinational enterprises $\underline { \text { differs } }$ from our conventional trade analysis in that multinational enterprise analysis emphasizes:

A) Absolute cost differentials rather than comparative cost differentials
B) The international movement of factor inputs rather than finished goods
C) Purely competitive markets rather than imperfectly competitive markets
D) Portfolio investments rather than direct foreign investments

Question 15

Suppose General Motors charges its Mexican subsidiary $1 million for auto assembly equipment that could be purchased on the open market for $800,000. This practice is $\underline { \text { best } }$ referred to as:

A) International dumping
B) Cost-plus pricing
C) Transfer pricing
D) Technological transfer

Question 16

Which type of multinational diversification occurs when the parent firm establishes foreign subsidiaries to produce intermediate goods going into the production of finished goods?

A) Forward vertical integration
B) Backward vertical integration
C) Forward horizontal integration
D) Backward horizontal integration

Question 17

Suppose that an American automobile manufacturer establishes foreign subsidiaries to market the automobiles. This practice is referred to as:

A) Forward vertical integration
B) Forward conglomerate integration
C) Backward vertical integration
D) Backward conglomerate integration

Question 18

"Risk spreading" is a motive most likely to be served when firms undergo:

A) Horizontal integration
B) Vertical integration
C) Conglomerate integration
D) None of the above

Question 19

The market power effect of an international joint venture can lead to welfare losses for the domestic economy unless offset by cost reductions. Which type of cost reduction would $\underline { \text { not } }$ lead to offsetting welfare gains for the overall economy?

A) R&D generating improved technology
B) Development of more productive machinery
C) New work rules promoting worker efficiency
D) Lower wages extracted from workers

Question 20

During the 1970s, American oil companies acquired nonenergy companies (e.g., copper, auto components) in response to anticipated decreases in investment opportunities in oil. This type of diversification is referred to as:

A) Horizontal integration
B) Conglomerate integration
C) Forward vertical integration
D) Backward vertical integration

Question 21

Figure 9.2 represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native U.S. workers. The demand schedule of labor is denoted by D₀.
Figure 9.2. U.S. Labor Market

Consider Figure 9.2. As the result of the Mexican migration to the United States:

A) U.S. capital owners lose
B) Native U.S. workers lose
C) U.S. capital owners and native U.S. workers lose
D) U.S. capital owners and native U.S. workers gain

Question 22

American labor unions have recently maintained that U.S. multinational enterprises have been:

A) Exporting American jobs by investing overseas
B) Exporting American jobs by keeping investment in the United States
C) Importing cheap foreign workers by shifting U.S. investment overseas
D) Importing cheap foreign workers by keeping U.S. investment at home

Question 23

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture

Consider Figure 9.1. Suppose that Sony Company and American Company jointly form a new firm, Venture Company, whose ball bearings replace the output sold by the parents in the domestic market. Assuming that Venture Company operates as a monopoly and that its costs equal MC₀=AC₀, the firm's price, output, and total profit would respectively equal:

A) $6, 2 units, $4
B) $4, 2 units, $2
C) $6, 4 units, $4
D) $4, 4 units, $2

Question 24

Figure 9.2 represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native U.S. workers. The demand schedule of labor is denoted by D₀.
Figure 9.2. U.S. Labor Market

Consider Figure 9.2, at labor market equilibrium, _____ workers are hired at a wage rate of $____ per hour, while total wages equal ____.

A) 2, $12, $24
B) 2, $12, $36
C) 3, $9, $27
D) 3, $9, $36

Question 25

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture

Consider Figure 9.1. Compared to the market equilibrium position achieved by Sony Company and American Company as competitors, Venture Company as a monopoly leads to a deadweight loss of consumer surplus of:

A) $2
B) $4
C) $6
D) $8

Question 26

International joint ventures can lead to welfare losses when the newly established firm:

A) Adds to the preexistent productive capacity
B) Enters markets neither parent could have entered individually
C) Yields cost reductions unavailable to parent firms
D) Gives rise to increased amounts of market power

Question 27

American labor unions accuse U.S. multinational firms of all of the following $\underline { \text { except } }$ that such firms

A) Enjoy unfair advantages in taxation
B) Export jobs by shifting technology overseas
C) Export jobs by shifting investment overseas
D) Operate at output levels where scale economies occur

Question 28

Which term best describes the New United Motor Manufacturing Co.?

A) Multinational enterprise
B) International joint venture
C) Multilateral contract
D) International commodity agreement

Question 29

Multinational enterprises:

A) Always produce primary goods
B) Always produce manufactured goods
C) Produce primary goods or manufactured goods
D) None of the above

Question 30

Which of the following refers to the price charged for products sold to a subsidiary of a multinational enterprise by another subsidiary in another nation?

A) Transfer pricing
B) International dumping
C) Price discrimination
D) Full-cost pricing

Question 31

Figure 9.2 represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native U.S. workers. The demand schedule of labor is denoted by D₀.
Figure 9.2. U.S. Labor Market

Consider Figure 9.2. At labor market equilibrium, the payment to U.S. capital owners equals:

A) $3
B) $6
C) $9
D) $12

Question 32

Multinational enterprises:

A) Increase the transfer of technology between nations
B) Make it harder for nations to foster activities of comparative advantage
C) Always enjoy political harmony in nations where their subsidiaries operate
D) Require governmental subsidies in order to conduct worldwide operations

Question 33

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture

Consider Figure 9.1. With Sony Company and American Company behaving as competitors, the equilibrium price and output respectively equal:

A) $4 and 2 units
B) $4 and 4 units
C) $6 and 2 units
D) $6 and 4 units

Question 34

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture

Consider Figure 9.1. At the equilibrium price, domestic households attain ____ of consumer surplus:

A) $4
B) $8
C) $12
D) $16

Question 35

Which business device involves the creation of a new business by two or more companies, often for a limited period of time?

A) Multinational enterprise
B) International joint venture
C) Horizontal merger
D) Vertical merger

Question 36

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture


-Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC₁=AC₁, which result from $\underline { \text { technological advances } }$ Realizing that Venture Company results in a deadweight loss of consumer surplus, the net effect of Venture Company's formation on the welfare of the domestic economy is:

A) No change
B) Gain of $2
C) Gain of $4
D) Loss of $2

Question 37

Firms undertake multinational operations in order to:

A) Hire low-wage workers
B) Manufacture in nations they have difficulty exporting to
C) Obtain necessary factor inputs
D) All of the above

Question 38

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture


-Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC₁=AC₁, which result from $\underline { \text { changes in work rules } }$ by Venture Company employees that led to higher worker productivity. The net effect of Venture Company's formation on the welfare of the domestic economy is:

A) No change
B) Gain of $2
C) Gain of $4
D) Loss of $2

Question 39

Figure 9.1 illustrates the market conditions facing Sony Company and American Company initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC₀=AC₀.
Figure 9.1. International Joint Venture


-Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC₁=AC₁, which result from $\underline { \text { wage concessions } }$ accepted by Venture Company employees. The net effect of Venture Company's formation on the welfare of the domestic economy is:

A) No change
B) Gain of $2
C) Loss of $2
D) Loss of $4

Question 40

Multinational enterprises face problems since they:

A) Cannot benefit from the advantages of comparative advantage
B) May raise political problems in countries where their subsidiaries operate
C) Can invest only at home, but not overseas
D) Can invest only overseas, but not at home

Question 41

Exxon Oil Co. would undertake forward vertical integration if its retailing division acquired oil wells in the Middle East.

Question 42

Vertical integration occurs if a parent multinational corporation establishes foreign subsidiaries to produce intermediate goods or inputs that go into the production of a finished good.

Question 43

International trade in goods and services and flows of productive factors are substitutes for each other.

Question 44

Most multinational corporations have a low ratio of foreign sales to total sales, usually 5 percent or less.

Question 45

Figure 9.3 Figure 9.3 represents the Mexican labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native Mexican workers. The demand schedule of labor is denoted by D_Mexico.

Consider Figure 9.3. Policies that permit Honduran workers to freely migrate to Mexico would likely be resisted by:

A) Mexican capital owners
B) Native Mexican workers
C) Mexican capital owners and native Mexican workers
D) Neither Mexican capital owners nor native Mexican workers

Question 46

Figure 9.3 Figure 9.3 represents the Mexican labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native Mexican workers. The demand schedule of labor is denoted by D_Mexico.

Consider Figure 9.3. If Honduran migration to Mexico results in the labor force increasing to 12 workers, denoted by schedule S₁, the:

A) Wage rate for native Mexican workers decreases and the payments to Mexican capital owners increases
B) Wage rate for native Mexican workers decreases and the payments to Mexican capital owners decreases
C) Wage rate for native Mexican workers increases and the payments to Mexican capital owners increases
D) Wage rate for native Mexican workers increases and the payments to Mexican capital owners decreases

Question 47

Figure 9.3 Figure 9.3 represents the Mexican labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native Mexican workers. The demand schedule of labor is denoted by D_Mexico.

Consider Figure 9.3, at labor market equilibrium with supply S₀, _____ workers are hired at a wage rate of $____ per hour, while total wages equal ____.

A) 6, 7 pesos, 24 pesos
B) 6, 6 pesos, 36 pesos
C) 7, 7 pesos, 49 pesos
D) 7, 6 pesos, 42 pesos

Question 48

"Guest worker" programs generally result in temporary migration of workers from:

A) Wealthy nations to wealthy nations
B) Wealthy nations to impoverished nations
C) Impoverished nations to wealthy nations
D) Impoverished nations to impoverished nations

Question 49

Most vertical foreign investment, as implemented by multinational corporations, is "forward" in nature rather than "backward."

Question 50

Multinational corporations sometimes locate manufacturing subsidiaries abroad to avoid tariff barriers which would place their products at a competitive disadvantage in a foreign country.

Question 51

Joint ventures may lead to

A) Welfare increases
B) Welfare decreases
C) No changes in welfare
D) All of the above

Question 52

Foreign direct investment typically occurs when

A) The earnings of the parent company are invested in plant expansion overseas
B) The parent company transfers jobs overseas
C) The parent company closes its foreign production plants
D) The parent company purchases bonds of foreign governments

Question 53

Figure 9.3 Figure 9.3 represents the Mexican labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native Mexican workers. The demand schedule of labor is denoted by D_Mexico.

Consider Figure 9.3. At labor market equilibrium, the payment to Mexican capital owners equals:

A) 3 pesos
B) 6 pesos
C) 9 pesos
D) 12 pesos

Question 54

Figure 9.2 represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S₀ and consists entirely of native U.S. workers. The demand schedule of labor is denoted by D₀.
Figure 9.2. U.S. Labor Market

Consider Figure 9.2. Policies that permit Mexican workers to freely migrate to the United States would likely be resisted by:

A) U.S. capital owners
B) Native U.S. workers
C) U.S. capital owners and native U.S. workers
D) Neither U.S. capital owners nor native U.S. workers

Question 55

Horizontal integration would occur if General Motors sets up a subsidiary in Mexico to produce automobiles identical to those that it produces in the United States.

Question 56

Critics of U.S. trade and immigration policy maintain that

A) It has depressed wages for many Americans
B) It has increased the supply of less educated workers in the United States
C) It has an adverse impact on the employment opportunities of less-skilled, American workers
D) All of the above

Question 57

____ refers to highly educated and skilled people who migrate from poor developing countries to wealthy industrial countries.

A) Direct investment
B) Portfolio investment
C) Transfer pricing
D) Brain drain

Question 58

American critics of U.S. multinational enterprises contend that they promote

A) Runaway jobs
B) Technology transfers abroad
C) Tax evasion
D) All of the above

Question 59

Forward vertical integration would occur if a U.S. automobile manufacturer acquired a German subsidiary.

Question 60

Mexico's ____ refer to an assemblage of U.S.-owned companies that use U.S.-owned parts and Mexican assembly to manufacture goods that are exported to the United States.

A) Multinational corporations
B) International joint ventures
C) Maquiladoras
D) Transplants

Question 61

During the 1980s and 1990s, Japanese auto firms established manufacturing facilities in the United States known as "transplants."

Question 62

Conglomerate integration would occur if General Motors Inc. of the United States acquired a controlling interest in a British chemical company.

Question 63

Joint ventures lead to national welfare gains if the newly established business yields productivity increases that would have been unavailable if each parent performed the same function separately.

Question 64

Mergers differ from joint ventures in that they involve the creation of a new business firm, rather than the union of two existing companies.

Question 65

Foreign direct investment would occur if Microsoft Inc. of the United States purchased securities of the French government.

Question 66

International joint ventures tend to yield a welfare increasing market-power effect and a welfare decreasing cost-reduction effect.

Question 67

Developing countries, such as Mexico and India, often close their borders to foreign companies unless they are willing to take on partner companies in developing countries.

Question 68

There is virtually universal agreement among economists that foreign direct investment in the United States has reduced the economic welfare of the average U.S. citizen.

Question 69

Multinational corporations often locate manufacturing operations abroad in order to take advantage of foreign resource endowments or wage scales.

Question 70

If a joint venture among competing firms is able to cut costs by extracting wage concessions from domestic workers, national welfare increases.

Question 71

In natural-resource oriented industries, such as oil and copper, joint ventures have often been formed by several companies since the cost of resource-extraction may be prohibitively large for a particular company.

Question 72

A joint venture leads to increases in national welfare if the cost-reduction effect is due to wage concessions and if it more than offsets the market-power effect.

Question 73

Joint ventures lead to losses in national welfare when the newly established business adds to pre-existing production capacity and fosters additional competition.

Question 74

A joint venture along two large competing companies tends to yield a market-power effect, which results in a reduction in consumer surplus, that is not offset by a corresponding gain to producers.

Question 75

Foreign-owned companies in the United States operate under more strict antitrust, environmental, and other regulations than U.S.-owned companies.

Question 76

Both economic theory and empirical studies support the notion that foreign direct investment is conducted in anticipation of future profits.

Question 77

By establishing transplant factories in the United States, Japanese automakers were able to avoid export restrictions imposed by the Japanese government, but not import restrictions imposed by the U.S. government.

Question 78

A joint venture leads to increases in national welfare if its cost-reduction effect is due to productivity gains and if it more than offsets the market-power effect.

Question 79

Foreign direct investment would occur if Mobile Inc. of the United States acquired sufficient common stock in a foreign oil company to assume voting control.

Question 80

If the size of the Canadian market is large enough to permit efficient production in Canada, a U.S. firm would profit by establishing a Canadian manufacturing subsidiary or licensing rights to a Canadian firm to manufacture and sell its product in Canada.