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Indicate whether the statement is true or false.
1. Conglomerate integration would occur if General Motors Inc. of the United States acquired a controlling interest in a
British chemical company.
a. True
b. False
2. In recent years, Apple Inc. has triggered controversy through its legal avoidance of U.S. income taxes.
a. True
b. False
3. Joint ventures lead to losses in national welfare when the newly established business adds to preexisting production
capacity and fosters additional competition.
a. True
b. False
4. Multinational corporations sometimes locate manufacturing subsidiaries abroad to avoid tariff barriers, which would
place their products at a competitive disadvantage in a foreign country.
a. True
b. False
5. International joint ventures tend to yield a welfare-increasing market-power effect and a welfare-decreasing cost-
reduction effect.
a. True
b. False
6. Developing countries have sometimes feared open immigration policies of developed countries on the grounds that
highly educated and skilled people may immigrate to the developed countries, thus limiting the growth potential of the
developing countries.
a. True
b. False
7. The effect of workers migrating from low-wage Mexico to high-wage United States is to redistribute income from
capital to labor in the United States and from labor to capital in Mexico.
a. True
b. False
8. There is universal agreement on an exact definition of a multinational enterprise.
a. True
b. False
9. Recent evidence suggests that wages paid by U.S. multinational enterprises to poor country workers are much lower
than local manufacturing wages.
a. True
b. False
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10. Under U.S. tax law, a parent American company can defer U.S. taxes paid on the income of its foreign subsidiary as
long as that income is retained overseas rather than repatriated to the United States.
a. True
b. False
11. 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.
a. True
b. False
12. The operations of an MNE have little effect on employment in either the host country or the home country.
a. True
b. False
13. 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.
a. True
b. False
14. 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.
a. True
b. False
15. 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.
a. True
b. False
16. Both economic theory and empirical studies support the notion that foreign direct investment is conducted in
anticipation of future profits.
a. True
b. False
17. If a joint venture among competing firms is able to cut costs by extracting wage concessions from domestic workers,
national welfare increases.
a. True
b. False
18. Royal Dutch Shell, Walmart Stores, and Sinopec Group are among the world’s smallest corporations in recent years.
a. True
b. False
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19. In the short run, the home country of an MNE will likely experience an employment decline when production is
shifted overseas.
a. True
b. False
20. Forward vertical integration would occur if a U.S. automobile manufacturer acquired a German subsidiary.
a. True
b. False
21. 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.
a. True
b. False
22. 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.
a. True
b. False
23. International trade in goods and services and flows of productive factors are substitutes for each other.
a. True
b. False
24. Foreign-owned companies in the United States operate under more strict antitrust, environmental, and other
regulations than U.S.-owned companies.
a. True
b. False
25. Concerning the decision of a U.S. resident to lend or invest abroad, Zimbabwe and Sudan have recently been
considered to be relatively safe investments regarding the risk of default.
a. True
b. False
26. 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.
a. True
b. False
27. The United States has discouraged the “brain drain” problem by permitting the immigration of unskilled workers while
restricting the immigration of skilled persons.
a. True
b. False
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28. 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.
a. True
b. False
29. General Electric and Boeing are examples of American companies that have greatly benefitted from the transfer of
technology from China to the United States.
a. True
b. False
30. 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.
a. True
b. False
31. Sinopec Group would undertake forward vertical integration if it acquired oil wells in the Middle East.
a. True
b. False
32. Multinational corporations often locate manufacturing operations abroad in order to take advantage of foreign
resource endowments or wage scales.
a. True
b. False
33. Due to transfer-pricing problems, multinational corporations must shift profits away from countries with low corporate
tax rates to high tax-rate countries, thus absorbing a larger tax bite.
a. True
b. False
34. Most multinational corporations have a low ratio of foreign sales to total sales, usually 5 percent or less.
a. True
b. False
35. In the United States, labor unions have generally resisted efforts to implement restrictions on the number of foreigners
allowed into the country.
a. True
b. False
36. Most vertical foreign investment, as implemented by multinational corporations, is “forward” in nature rather than
“backward.”
a. True
b. False
37. Foreign direct investment would occur if Microsoft Inc. of the United States purchased securities of the French
government.
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a. True
b. False
38. As workers migrate from low-wage Mexico to high-wage United States, wages tend to rise in Mexico and fall in the
United States.
a. True
b. False
39. 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.
a. True
b. False
40. In recent years, Canada has virtually closed its borders to foreign workers who desire to migrate to the country.
a. True
b. False
41. Most Japanese auto assembly plants located in the United States are located in southern states such as Texas,
Alabama, and Tennessee.
a. True
b. False
42. Mergers differ from joint ventures in that they involve the creation of a new business firm, rather than the union of
two existing companies.
a. True
b. False
43. Imagine that in 2017, the Ford Motor Company earned $521 million from its production operations in Mexico. Those
earnings are then used to expand those same Mexican production operations. This is NOT an example of foreign direct
investment.
a. True
b. False
44. According to U.S. tax law, a multinational enterprise headquartered in the United States is allowed credits against its
U.S. income tax liabilities in an amount equal to the income taxes it pays to foreign governments.
a. True
b. False
45. Critics of multinational corporations maintain that they often abandon domestic workers in order to take advantage of
lower wage scales abroad.
a. True
b. False
46. The theory of multinational enterprise is totally inconsistent with the principle of comparative advantage.
a. True
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b. False
47. Labor migration tends to increase output and decrease wages in the country of immigration while decreasing output
and increasing wages in the country of emigration.
a. True
b. False
48. The migration of workers from Mexico to the United States tends to exert downward pressure on the wages of native
U.S. workers that compete against Mexican workers for jobs.
a. True
b. False
49. During the 1980s and 1990s, Japanese auto firms established manufacturing facilities in the United States known as
“transplants.”
a. True
b. False
50. About two thirds of Canada’s permanent visas are granted for Canada’s economic needs, such as the filling of labor
shortages. In contrast, about two thirds of U.S. green cards are granted for family reasons.
a. True
b. False
51. Developing countries, such as China and India, have historically closed their borders to foreign companies unless they
are willing to take on partner companies in developing countries.
a. True
b. False
52. 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.
a. True
b. False
53. Immigration tends to reduce the incomes of all factors of production.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
54. 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 BEST referred to as
a. international dumping.
b. cost-plus pricing.
c. transfer pricing.
d. technological transfer.
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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 DMexico.
55. Consider Figure 9.3. At labor market equilibrium with supply S0, _____ workers are hired at a wage rate of ____
pesos per hour, while total labor income equals ____ pesos.
a. 6, 7, 42
b. 6, 6, 36
c. 7, 7, 49
d. 7, 6, 42
56. The ______ refers to the price charged for goods sold to a subsidiary of a multinational enterprise by another
subsidiary in another country
a. corporate price
b. transfer price
c. monopoly price
d. dumping price
57. Suppose that General Motors per unit costs for a Mexican subsidiary are $17,000 per truck for 10,000 trucks, and
$17,500 per truck for 12,000 trucks. A local Mexican firm can produce the same amounts at $16,500 and $18,000. These
trucks can also be produced in Michigan and exported to Mexico at a constant cost of $18,500 per truck. If Mexican
demand for trucks is 10,000 trucks, General Motor’s lowest cost option is to
a. use a licensing agreement and have the Mexican firm produce the trucks.
b. use a Mexican subsidiary.
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c. export the trucks to Mexico.
d. export 5,000 trucks to Mexico and use a Mexican subsidiary for the other 5,000 trucks.
58. Trade analysis involving multinational enterprises 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.
59. Once a firm knows that foreign demand exists, its next step is to
a. use foreign direct investment.
b. negotiate a licensing agreement with the foreign government.
c. cease operations in its home country.
d. ascertain the lowest-cost method of supplying goods abroad.
60. 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 NOT lead to offsetting welfare gains for the overall
economy?
a. research and development generating improved technology
b. development of more productive machinery
c. new work rules promoting worker efficiency
d. lower wages extracted from workers
61. Suppose that Samsung’s production costs are the same in both China and India. Also suppose that Samsung can
produce cellphones in China for an average cost of $10 per phone for 300 million phones, $12 per phone for 200 million
phones, and $15 per phone for 100 million phones. If customers in India demand 100 million phones and customers in
China demand 200 million phones, Samsung’s lowest cost option is to
a. produce phones only in India and export phones to China.
b. produce phones only in China and export phones to India.
c. produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese
demand.
d. produce 150 million phones in India for Indian demand and 50 million to export to China and produce 150 million
phones in China for Chinese demand.
62. Imagine that in 2016 a U.S. firm acquired a plant in France. In 2017 that plant accounted for 10 percent of the U.S.
firm’s sales. Why is the U.S. firm NOT a multinational enterprise?
a. The U.S. firm IS a multinational enterprise because it engaged in foreign direct investment.
b. Its foreign sales took place in a different year than its foreign acquisition.
c. Because of its trade agreements with France, a U.S. firm operating there is not considered multinational.
d. Its foreign sales are less than 25 percent.
63. 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.
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64. In recent years, the LARGEST amount of U.S. direct investment abroad has occurred in
a. Latin America.
b. Europe.
c. China.
d. Russia.
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
65. 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.
66. Research conducted by the National Bureau of Economic research suggests that, while in the _________immigration
lowers average wages, in the ___________wages________.
a. short run, long run, also decrease
b. long run, short run, also decrease
c. long run, short run, increase
d. short run, long run, remain essentially unchanged
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67. Suppose that Samsung’s production costs are the same in both China and India. Also suppose that Samsung can
produce cellphones in China for an average cost of $10 per phone for 300 million phones, $12 per phone for 200 million
phones, and $15 per phone for 100 million phones. If customers in India demand 100 million phones and customers in
China demand 200 million phones, and there are transportation costs of $6 per phone, Samsung’s lowest cost option is to
a. produce phones only in India and export phones to China.
b. produce phones only in China and export phones to India.
c. produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese
demand.
d. produce 150 million phones in India for Indian demand and 50 million to export to China and produce 150 million
phones in China for Chinese demand.
68. Imagine that the Brazilian aircraft manufacturer Embraer purchases a 10 percent share of a Canadian aircraft
distribution company, in order to facilitate the marketing and sales of its aircraft in Canada. This is an example of
a. portfolio investment.
b. forward integration.
c. conglomerate integration.
d. horizontal integration.
Figure 9.1 illustrates the market conditions facing SKF and Timken, 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
69. Consider Figure 9.1. Assume Venture Company’s formation yields new cost reductions, indicated by MC1=AC1,
which result from changes in work rules by Venture Company employees that led to higher worker productivity.
Compared to the original competitive equilibrium, the net effect of Venture Company’s formation on welfare now is
a. no change.
b. gain of $2.50.
c. gain of $5.50.
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d. loss of $5.50.
70. Consider Figure 9.1. With SKF and Timken 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.
71. 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.
Figure 9.1 illustrates the market conditions facing SKF and Timken, 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
72. Consider Figure 9.1. Assume Venture Company’s formation yields new cost reductions, indicated by MC1=AC1,
which result from wage concessions accepted by Venture Company employees. Compared to the original competitive
equilibrium, the net effect of Venture Company’s formation on welfare now is
a. no change.
b. gain of $5.50.
c. loss of $2.50.
d. loss of $3.50.
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73. A U.S. firm is deciding on whether or not to build a production facility in Montenegro. All else equal, if Montenegro
has a very low foreign debt as a percentage of GDP, it therefore has relatively low
a. economic risk.
b. political risk.
c. investment risk.
d. financial risk.
74. A U.S. firm is deciding on whether or not to build a production facility in Tunisia. All else equal, if Tunisia has very
little corruption, it therefore has relatively low
a. economic risk.
b. political risk.
c. investment risk.
d. financial risk.
75. All of the following are potential advantages of an international joint venture 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.
76. 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 these are correct.
77. Which of the following are the economic forces underlying the international flow of goods and services?
a. Productive factors move from nations where they are scarce to nations where they are abundant.
b. Productive factors flow in response to differences in returns when they are less than the costs of moving from one
country to another.
c. Productive factors move for reasons that are significantly different from those economic forces that explain the
international movement flow of goods and services.
d. Productive factors move from where they are abundant to where they are scarce.
Figure 9.1 illustrates the market conditions facing SKF and Timken, 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
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78. Consider Figure 9.1. Assume Venture Company’s formation yields new cost reductions, indicated by MC1=AC1,
which result from technological advances. Compared to the original competitive equilibrium, the net effect of Venture
Company’s formation on welfare now is
a. no change.
b. gain of $5.50.
c. gain of $2.50.
d. loss of $5.50.
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
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79. Consider Figure 9.2. At labor market equilibrium, income earned by U.S. capital owners equals
a. $3.
b. $6.
c. $9.
d. $12.
80. 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
81. Apple develops new iPhones in the United States but builds them overseas. Which type of integration is this?
a. conglomerate
b. vertical
c. horizontal
d. forward
82. 24. 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.
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83. The least common type of migration pattern is for people to migrate permanently from
a. rich nations to rich nations.
b. poor nations to poor nations.
c. poor nations to rich nations.
d. rich nations to poor nations.
84. The largest share of U.S. direct investment abroad has recently gone to
a. Canada.
b. China.
c. Europe.
d. Latin America.
85. MOST foreign direct investment in the United States occurs in
a. finance and insurance.
b. information technology.
c. manufacturing.
d. mining and extraction.
86. A U.S. firm is deciding on whether or not to build a production facility in Uruguay. All else equal, if Uruguay has a
relatively high inflation rate, it therefore has relatively high
a. economic risk.
b. political risk.
c. investment risk.
d. financial risk.
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 DMexico.
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87. Consider Figure 9.3. If Honduran migration to Mexico results in the labor force increasing to 12 workers, denoted by
labor supply curve 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.
88. The “brain drain” is
a. of concern primarily to host countries.
b. of concern primarily to source countries.
c. the movement of capital from a source country to a host country.
d. the simultaneous movements of capital and labor from a source country to a host country.
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
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89. Consider Figure 9.2, at labor market equilibrium, _____ workers are hired at a wage rate of $____ per hour, while
total labor income equals $____.
a. 2, 12, 24
b. 2, 12, 36
c. 3, 9, 27
d. 3, 9, 36
90. Who tends to benefit from increased immigration?
a. owners of capital in the home country
b. labor in the home country
c. both owners of capital and labor in the home country
d. neither owners of capital nor labor in the home country
91. “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.
92. Concerning the decision by an American to lend or invest abroad, which of the following countries is generally
considered to be the most risky?
a. Germany
b. Switzerland
c. Singapore
d. Sudan
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93. Multinational enterprises may provide benefits to their SOURCE (home) countries because they may
a. secure raw materials for the 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.
94. Imagine that Amazon purchases a Japanese grocery store chain and begins home delivery of groceries in Japan. This is
an example of
a. horizontal integration.
b. vertical integration.
c. conglomerate integration.
d. backward integration.
95. ____ 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
96. 47. Joint ventures may lead to
a. welfare increases.
b. welfare decreases.
c. no changes in welfare.
d. All of these are correct.
97. 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.
98. Suppose that there are significant costs associated with coordinating a subsidiary with the parent organization and
assessing the market potential of a foreign country. If there are also significant tariffs, in this case ________________is
likely to be the lowest-cost method of supplying goods abroad.
a. licensing
b. subsidiary production
c. direct exporting
d. conglomerate integration
99. American labor unions maintain that U.S. multinational enterprises
a. export American jobs by investing overseas.
b. export American jobs by keeping investment in the United States.
c. import cheap foreign workers by shifting U.S. investment overseas.
d. import cheap foreign workers by keeping U.S. investment at home.
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100. 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.
101. Concerning the decision by an American to lend or invest abroad, which of the following countries is generally
considered to be the least risky?
a. United States
b. Singapore
c. China
d. Ukraine
102. Which of the following would 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
103. Suppose a U.S. CEO wants to expand her firm’s manufacturing production. She argues it should occur in another
country, because U.S. wages are 15 percent higher. Which of the following will refute her argument?
a. U.S. workers are 20 percent more productive.
b. The foreign country is closer to a source of a needed raw material.
c. The foreign country has a free trade agreement with an important market for the finished good.
d. None of these are correct.
104. 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.
105. Which term best describes the Iran Oil Investment Co.?
a. multinational enterprise
b. international joint venture
c. multilateral contract
d. international commodity agreement
106. The decision to establish foreign manufacturing operations through direct investment or licensing depends on
a. the extent to which capital is used in the production process.
b. the size of the foreign market.
c. the amount of fixed cost a firm must bear when establishing an overseas facility.
d. All of these are correct.
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107. Trade analysis involving multinational enterprises is in agreement with conventional trade analysis in that both
emphasize
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. that production will take place in a low-cost country.
108. Which of the following is an example of a cost motive for the formation of multinational enterprises?
a. avoiding tariffs by obtaining foreign manufacturing facilities
b. to utilize less productive foreign labor
c. to have production farther from markets for the finished good
d. to pay higher corporate taxes
109. Most of Toyota’s auto plants in the United States are located in
a. the Pacific Northwest states, such as Washington and Idaho.
b. mountain states such as Wyoming and Montana.
c. southern states such as Tennessee, Kentucky, and Alabama.
d. northeastern states such as Main, Vermont, and New Hampshire
110. Since the 1980s, Japanese auto companies have invested billions of dollars in U.S. based assembly facilities, known
as transplants. This investment is explained by all of the following EXCEPT the desire to
a. silence critics who insist that autos sold in the United States must be built there.
b. avoid the potential import barriers of the United States.
c. provide a hedge against fluctuations in the dollar-yen exchange rate.
d. All of these are correct.
111. 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
112. Which of the following do American labor unions NOT accuse U.S. multinational firms of?
a. They enjoy unfair advantages in taxation.
b. They export jobs by shifting technology overseas.
c. They export jobs by shifting investment overseas.
d. They operate at output levels where scale economies occur.
113. 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.
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Figure 9.1 illustrates the market conditions facing SKF and Timken, 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
114. Consider Figure 9.1. At the equilibrium price, the domestic economy attains ____ of economic surplus.
a. $4
b. $8
c. $12
d. $16
115. Consider Figure 9.1. Compared to the market equilibrium position achieved by SKG and Timken as competitors,
Venture Company as a monopoly leads to a deadweight welfare loss at
a. $2.
b. $4.
c. $6.
d. $8.
116. Which of the following is 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
117. During the 1980s, 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.
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118. In recent years, MOST foreign direct investment in the United States has come from
a. Europe.
b. China.
c. Latin America.
d. Russia.
119. Imagine that a U.S. firm issues a press release regarding its intentions to acquire a foreign firm, a competitor. This
competitor is located in a country with cheaper raw materials, more productive labor, and lower corporate tax rates.
Which of the following factors is consistent with a demand motive for foreign direct investment?
a. The foreign firm is a competitor.
b. There are cheaper raw materials.
c. There is more productive labor.
d. None of these are correct.
Figure 9.1 illustrates the market conditions facing SKF and Timken, 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
120. Consider Figure 9.1. Suppose that SKG and Timken 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.
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121. Suppose that a local firm in a foreign market is incapable of adapting its operations to a multinational enterprise’s
production process. In this case______________ is not the lowest-cost method of supplying goods abroad.
a. licensing
b. foreign direct investment
c. direct exporting
d. backward integration
122. Suppose that a steel company locates a production facility near a source of iron. This is an example of
a. a demand factor motive for foreign direct investment.
b. a cost factor motive for foreign direct investment.
c. a government policy motive for foreign direct investment.
d. a raw material motive for foreign direct investment.
123. Which of the following BEST refers to the outright construction or purchase abroad of productive facilities, such as
manufacturing plants, by domestic residents?
a. foreign direct investment
b. portfolio investment
c. short-term capital investment
d. long-term capital investment
124. 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 these are correct
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
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125. Consider Figure 9.2. Assume that Mexican labor migration yields a new labor supply curve, S1, which is the
combination of domestic labor supply and Mexican labor. As the result of the Mexican migration to the United States
a. U.S. capital owners lose income.
b. native U.S. workers lose income.
c. U.S. capital owners and native U.S. workers lose income.
d. U.S. capital owners and native U.S. workers gain income.
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 DMexico.
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126. Consider Figure 9.3. At labor market equilibrium, the income earned by Mexican capital owners equals
a. 3 pesos.
b. 6 pesos.
c. 9 pesos.
d. 12 pesos.
127. Imagine that Microsoft is having difficulty selling laptops in Kenya because of differences in local tastes. It decides
to build a subsidiary in Kenya. This is an example of a _______________ motive for foreign direct investment.
a. cost factor
b. demand factor
c. country risk
d. backward integration
128. Trade analysis involving multinational enterprises DIFFERS from our conventional trade analysis in that
multinational enterprise analysis emphasizes
a. intrafirm sales where prices are determined by factors other than a competitive pricing system.
b. the international movement of finished goods.
c. purely competitive markets rather than imperfectly competitive markets.
d. portfolio investments rather than direct foreign investments.
129. Suppose that Samsung’s production costs are the same in both China and India. Also suppose that Samsung can
produce cellphones in China for an average cost of $10 per phone for 300 million phones, $12 per phone for 200 million
phones, and $15 per phone for 100 million phones. If customers in India demand 100 million phones and customers in
China demand 200 million phones, and there is an Indian tariff of $10 per phone, Samsung’s lowest cost option is to
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a. produce phones only in India and export phones to China.
b. produce phones only in China and export phones to India.
c. produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese
demand.
d. produce 150 million phones in India for Indian demand and 50 million to export to China and produce 150 million
phones in China for Chinese demand.
130. Suppose that regardless of the amount of production, a subsidiary’s per unit costs are always less than a local firm’s.
If there are significant tariffs, in this case ________________is likely to be the lowest-cost method of supplying goods
abroad.
a. licensing
b. subsidiary production
c. direct exporting
d. vertical integration
131. In 2016, three of the world’s five largest corporations were based in
a. the U.S.
b. Germany.
c. Canada.
d. China.
132. 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.
133. Are there any differences between the theory of multinational enterprises and conventional trade theory?
134. What are the disadvantages of forming joint ventures?
135. What are the key elements underlying Canada’s immigration policy?
136. What particular aspects of multinational operations generate potential conflict?
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Answer Key
1. True
2. True
3. False
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