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Suggested answers to end of chapter questions and problems
1. Disagree. The Heckscher–Ohlin theory indicates that countries should
export some products (products that are intensive in the country’s
abundant factors) and import other products (products that are
2. Scale economies exist when unit (or average) cost declines as production during a period
of time is larger. (1) The key role of scale economies in the analysis of markets that are
3. There are two major reasons. First, product differentiation can result in intra-industry
trade. Imports do not lead to lower domestic output of the product because exports
4. If the government is going to permit free export of the pasta (no export taxes or export
limits), then the government should choose to form the industry as a monopoly. The
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
5. Disagree. External scale economies are cost or quality advantages to
)rms in an industry that locate close to each other, that is, in the same
small geographic area. The key in*uence of external scale economies
6. a. The market equilibrium price depends on how intensely Boeing and Airbus compete in
order to gain sales. A low-price equilibrium occurs if Boeing and Airbus compete
b. From the perspective of the well-being of the United States or Europe, a high-price
equilibrium could be desirable because it involves setting high prices on export sales to
c. The low-price outcome is desirable for a country like Japan or Brazil that imports all of
d. Yes, Japan or Brazil still gains from importing airplanes. Some amount of "consumer
7. a. Consumers in Pugelovia are likely to experience two types of e-ects from
the opening of trade. First, consumers gain access to the varieties of
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
b. Producers in Pugelovia also are likely to experience two types of e-ects
from the opening of trade. First, imports add extra competition for
domestic sales. As we noted in the answer to part a, this is likely to
8. Yes, it is possible. (a) If the product is undifferentiated and has a perfectly competitive
market, the extra demand in the rest of the world is likely to result in an increase in the
world price of the product. Essentially, the shift to the right in the world demand curve
moves the equilibrium along an upward-sloping world supply curve, resulting in an
9. We can use a graph like Figure 6.5, as shown on the next page, to
examine the change in the number of models. In the initial situation,
the global market was in equilibrium with 40 models and a typical price
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
(washers)
10. a. In the initial free-trade equilibrium, the typical firm was earning zero economic profit. At
the price of $600 per washer, the downward-sloping demand curve D0 for this firm’s
model was just tangent to the firm’s average cost curve for producing the model. When
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
(washers)
b. In the new long-run equilibrium, the typical firm faces a more elastic demand curve
D1and earns zero economic profit. This occurs at the price P1 and the quantity Q1.
11. a. Here is the calculation for perfumes: IIT share = 1 - [|3 - 234|/(3 + 234)] = 0.025 (or
2.5%). Using the same type of calculation for the other products, here are the IIT shares
for each product:
b. For Japan, total trade in these seven products is $157,676 million. The weighted average
of the IIT shares is:
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
12. There are a small number of firms that produce electric railroad locomotives and two
countries (Germany and China) account for most world exports. Global oligopoly that
results from internal scale economies that extend over a large range of output is the
13. a. External scale economies mean that the average costs of production
decline as the size of an industry in a speci)c geographic area
increases. With free trade and external economies, production will tend
b. Both countries gain from trade in products with external economies.
The major e-ect is that the average cost of production declines as
production is concentrated in one geographic area. If the industry is
14.a. Among the strong arguments are the following. First, freer trade brings gains from trade,
even for products that can be produced locally. With freer trade resources can be
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
b. With respect to short-run pressures on economic well-being, owners of factors employed
in industries that could expand exports are likely to support the policy shift, because the
demand for these factors increases as firms attempt to expand production. Owners of
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
