International Economics, 9e (Krugman et al.)
Chapter 7 External Economies of Scale and the International Location of Production
7.1 Economies of Scale and International Trade: An Overview
1) External economies of scale arise when the cost per unit
A) falls as the industry grows larger and rises as the average firm grows larger.
B) rises as the industry grows larger and falls as the average firm grows larger.
C) falls as the industry and the average firm grows larger.
D) remains constant over a broad range of output.
E) rises as the industry and the average firm grows larger.
2) Internal economies of scale arise when the cost per unit
A) falls as the average firm grows larger.
B) rises as the industry grows larger.
C) falls as the industry grows larger.
D) rises as the average firm grows larger.
E) remains constant over a broad range of output.
3) Where there are internal economies of scale, the scale of production possible in a country is
constrained by
A) the size of the domestic plus the foreign market.
B) the size of the country.
C) the size of the trading partner’s country.
D) the size of the domestic market.
E) the size of the foreign market.
4) If a firm’s 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 equilibrium.
D) constant returns to scale
E) decreasing returns to scale.
5) One advantage of the specialization that results from international trade is that countries can take
advantage of
A) scale economies.
B) production diversification
C) smaller countries.
D) taste reversals.
E) lower transport costs.
6) Internal economies of scale will ________ average cost when output is ________ by ________.
A) reduce; increased; a firm
B) increase; increased; a firm
C) reduce; increased; the industry
D) increase; increased; the industry
E) reduce; reduce; the industry
7) 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?
8) 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?
9) Why are increasing returns to scale and fixed costs important in models of international trade and
imperfect competition?
10) 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
7.2 Economies of Scale and Market Structure
1) The existence of 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) focuses more on individual firms than the industry as a whole.
2) The existence of internal economies of scale
A) cannot be associated with a perfectly competitive industry.
B) may be associated with a perfectly competitive industry.
C) is associated only with sophisticated products such as aircraft.
D) cannot form the basis for international trade.
E) focuses more on the industry than individual firms.
3) When there are external economies of scale, an increase in the size of the market will
A) increase the number of firms and lower the price per unit.
B) increase the number of firms and raise the price per unit.
C) decrease the number of firms and raise the price per unit.
D) decrease the number of firms and lower the price per unit.
E) not affect the number of firms, but will lower the price per unit.
4) If some industries exhibit internal increasing returns to scale in each country, we should not expect to
see
A) perfect competition in these industries.
B) intra-industry trade between countries.
C) inter-industry trade between countries.
D) high levels of specialization in both countries.
E) increased productivity in both countries.
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.
7.3 The Theory of External Economies
1) What is meant by an “industrial district” and what are the three main sources of the economic
advantages derived from locating in such a district?
2) External economies of scale often arise because similar firms
A) locate in the same geographic region.
B) collude to fix prices and increase profits.
C) have excellent internal logistics.
D) agree to cooperate to expand global trade.
E) have economies of scale in production.
3) 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) external economies of scale.
B) internal economies of scale.
C) consolidation of industries into a small number of powerful firms.
D) suppression of innovations and collusive behavior, driving up prices.
E) government intervention and regulation.
4) 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) downward sloping; downward sloping
B) upward sloping; horizontal
C) horizontal; upward sloping
D) downward sloping; horizontal
E) upward sloping; downward sloping
5) 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) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease
7.4 External Economies and International Trade
1) 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%
2) 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.
3) In the presence of external economies of scale, trade
A) may or may not improve welfare in both countries.
B) will unambiguously improves welfare in both countries.
C) will unambiguously worsens welfare in both countries.
D) will unambiguously worsen welfare in the exporting country and improve welfare in the importing
country.
E) will unambiguously improve welfare in the exporting country and worsen welfare in the importing
country.
4) A learning curve relates ________ to ________ and is a case of ________ returns.
A) unit cost; cumulative production; dynamic increasing returns
B) output per time period; long-run marginal cost; dynamic increasing returns
C) unit cost; cumulative production; dynamic decreasing returns
D) output per time period; long-run marginal cost; dynamic decreasing returns
E) labor productivity; education; increasing marginal returns
5) The learning curve describes the ________ relationship between ________ and ________.
A) inverse; unit cost; cumulative output
B) direct; unit cost; cumulative output
C) inverse; education; annual income
D) direct; education; annual income
E) direct; education; labor productivity
7.5 Interregional Trade and Economic Geography
1) 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) nontraded; traded; external economies.
B) traded; nontraded; internal economies
C) nondurable; durable; natural resource
D) durable; nondurable; natural resources
E) consumer; style; population
2) 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) traded; uniform; nontraded; variable
C) durable; uniform; nondurable; variable
D) nondurable; uniform; durable; variable
E) nontraded; variable; traded; uniform
3) Patterns of interregional trade are primarily determined by ________ rather than ________ because
factors of production are generally ________.
A) external economies; natural resources; mobile
B) internal economies; external economies; mobile
C) external economies; population; immobile
D) internal economies; population; immobile
E) population; external economies; immobile
4) The primary determinant of patterns of interregional trade is
A) accidents of history.
B) resource allocations.
C) factor abundance.
D) weather.
E) centralized optimization.