Deck 7: External Economies of Scale and the International Location of Production

Question 1

External economies of scale often arise because similar firms

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

Answer 1

locate in the same geographic region.

Question 2

What is meant by "a cluster of firms" and what are the three main sources of the economic advantages derived from locating in such a district?

Answer 2

A cluster of firms 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.

Question 3

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

A) scale economies.
B) taste reversals.
C) production diversification
D) smaller countries.
E) lower transport costs.

Answer 3

scale economies.

Question 4

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

A) intra-industry equilibrium.
B) decreasing returns to scale.
C) imperfect competition.
D) increasing returns to scale.
E) constant returns to scale

Question 5

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

A) reduce; increased; the industry
B) reduce; increased; a firm
C) increase; increased; a firm
D) increase; increased; the industry
E) reduce; reduce; the industry

Question 6

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.

Question 7

External economies of scale arise when the cost per unit

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

Question 8

Internal economies of scale arise when the cost per unit

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

Question 9

The existence of external economies of scale

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

Question 10

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

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

Question 11

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?

Question 12

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

Question 13

The existence of internal economies of scale

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

Question 14

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

A) reduce; increased; a firm
B) reduce; increased; the industry
C) increase; increased; a firm
D) reduce; reduce; the industry
E) increase; increased; the industry

Question 15

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?

Question 16

If a firm's output 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 equilibrium.
D) constant returns to scale
E) decreasing returns to scale.

Question 17

Where there are internal 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 domestic market.
C) the size of the trading partner's country.
D) the size of the foreign market.
E) the size of the domestic plus the foreign market.

Question 18

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

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

Question 19

If a firm's output less 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 equilibrium.
D) constant returns to scale
E) decreasing returns to scale.

Question 20

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

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

Question 21

The primary determinant of patterns of interregional trade is

A) accidents of history.
B) centralized optimization.
C) resource allocations.
D) weather.
E) factor abundance.

Question 22

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.

A) higher; increase; 50%
B) higher; increase; 100%
C) higher; decrease; 0%
D) lower; increase; 50%
E) lower; increase; 100%

Question 23

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 ________.

A) durable; nondurable; natural resources
B) consumer; style; population
C) nontraded; traded; external economies
D) nondurable; durable; natural resource
E) traded; nontraded; internal economies

Question 24

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

A) external economies; population; immobile
B) external economies; natural resources; mobile
C) internal economies; population; immobile
D) population; external economies; immobile
E) internal economies; external economies; mobile

Question 25

In the presence of external economies of scale, trade

A) will unambiguously improve welfare in both countries.
B) will unambiguously worsen welfare in the exporting country and improve welfare in the importing country.
C) may or may not improve welfare in both countries.
D) will unambiguously improve welfare in the exporting country and worsen welfare in the importing country.
E) will unambiguously worsen welfare in both countries.

Question 26

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

A) unit cost; cumulative production; dynamic increasing
B) output per time period; long-run marginal cost; dynamic decreasing
C) output per time period; long-run marginal cost; dynamic increasing
D) unit cost; cumulative production; dynamic decreasing
E) labor productivity; education; increasing marginal

Question 27

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 ________.

A) increase; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; decrease
E) decrease; remain constant

Question 28

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 ________.

A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease

Question 29

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 ________.

A) horizontal; upward sloping
B) downward sloping; downward sloping
C) upward sloping; downward sloping
D) upward sloping; horizontal
E) downward sloping; horizontal

Question 30

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.

Question 31

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.

A) higher; increase; 100%
B) higher; increase; 50%
C) lower; increase; 100%
D) lower; increase; 50%
E) higher; decrease; 0%

Question 32

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

A) inverse; education; annual income
B) direct; education; annual income
C) direct; education; labor productivity
D) inverse; unit cost; cumulative output
E) direct; unit cost; cumulative output

Question 33

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 ________.

A) downward sloping; downward sloping
B) upward sloping; horizontal
C) horizontal; downward sloping
D) downward sloping; horizontal
E) upward sloping; downward sloping

Question 34

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 ________.

A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease

Question 35

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

A) nontraded; uniform; traded; variable
B) nondurable; uniform; durable; variable
C) durable; uniform; nondurable; variable
D) traded; uniform; nontraded; variable
E) nontraded; variable; traded; uniform

Question 36

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.

Question 37

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

A) accidents of history.
B) economic geography.
C) factor abundance theory.
D) weather analysis.
E) centralized optimization.