Instructor’s Manual
1. Vertical integration generally results in the establishment of foreign subsidiaries that supply inputs
going into the finished good. Horizontal integration occurs when the parent firm sets up a subsidiary to
2. The manufacturing sector has dominated in both cases.
3. That rates of return on investments in developing countries exceed those on investments in industrial
countries in part reflects political risks and fears of expropriation often associated with the developing
4. Demand and cost factors tend to underlie a firm’s decision to undergo direct foreign investment.
Instructor’s Manual
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5. There is no exact definition of a multinational enterprise. However, it is generally recognized that
multinational firms operate in more than one country, conduct research and development activities in
6. The decision to undergo direct foreign investment or licensing is based on several criteria: (1) import
tariff structures; (2) the size of the foreign market in relation to the firm’s most efficient plant size; (3)
7. As a source of conflict, multinational enterprises involve issues pertaining to employment, national
sovereignty, the balance of payments, and taxation.
8. The traditional trade model involves the movement of finished products among nations, while
multinational enterprise analysis stresses movements of factor inputs. Both models are based on the
9. A joint venture leads to welfare gains when the newly established firm adds to productive capacity and
fosters competition, enters markets that the parent firms could not enter, and yields cost reductions
10. In response to higher U.S. wage rates, labor migration from Mexico to the United States results in a
reduction in the Mexican labor supply and an increase in the U.S. labor supply. Wage rates tend to
rise in Mexico and fall in the United States until they equalize. The labor migration hurts native U.S.
11. a. P = $4, Q = 5, consumer surplus = $12.50, profit = $0.
b. Q = 3, P = $6, profit = $6, deadweight loss of consumer surplus = $2.
12. a. Wage = $6, payments to native American workers = $12, payments to U.S. capital owners = $2.
b. Wages = $4, payments to native American workers = $8, payments to U.S. capital owners = $8.