Industrial Structure and Trade in the Global Economy — Business without Borders 299
Chapter Eleven
Industrial Structure and Trade in the Global Economy — Businesses without Borders
True/False
1. The study of the structure and interactions among firms and markets is called the study of industrial organizations.
Ans: True
Dif: E
2. International trade in substitutes and complementary goods is called intra-industry trade.
Ans: True
Dif: E
3. The U.S. imports Mercedes from Germany and exports Fords to Germany. This is an example of inter-industry trade.
Ans: False
Dif: E
4. If a firm’s costs are largely fixed costs instead of variable costs, the firm is likely to exhibit economies of scale.
Ans: True
Dif: D
5. If a firm’s long run average cost curve shifts upward as it grows, the firm has economies of scale.
Ans: False
Dif: M
6. The scale of production that minimizes the ratio of total product cost to output is called the minimum efficient scale.
Ans: True
Dif: M
7. If all firms in an industry face the same long run average cost curve then the biggest firm in the industry will always be the most profitable.
Ans: False
Dif: D
8. A firm is consistently generating revenues greater than the opportunity cost of being in the industry. We can expect that new firms will be attempting to enter this industry over time.
Ans: True
Dif: E
9. If international trade is introduced into a monopolistically competitive industry the demand for a domestic firm’s product will probably become more elastic.
Ans: True
Dif: D
10. In perfectly competitive and monopolistically competitive industries we can expect the economic profits for each firm in these industries to equal zero in the long run.
Ans: True
Dif: M
11. A monopolistically competitive firm differs from a perfectly competitive firm because the firm in the monopolistically competitive industry has a unique demand curve for its product while a firm in the perfectly competitive industry does not.
Ans: True
Dif: M
12. The demand curve of a monopolistically competitive firm differs from a perfectly competitive firm because the firm in the monopolistically competitive industry has a demand curve for its product that is totally unrelated to the demand curve for other firms in the industry.
Ans: False
Dif: M
13. With a downward sloping demand curve, the marginal revenue curve always lies below the demand curve.
Ans: True
Dif: D
14. If a firm acquires a foreign subsidiary to produce goods or services similar to those produced in the home country this is would be called horizontal foreign direct investment.
Ans: True
Dif: E
15. Suppose that Standard Oil of America buys oil from Saudi Arabia, refines it at a plant in Mexico and sells it in America. The refining plant in Mexico is an example of vertical foreign direct investment.
Ans: True
Dif: E
16. Horizontal FDI results in capital inflows to a country but not usually as much additional international trade as vertical FDI.
Ans: True
Dif: M
17. Of the two types of FDI, horizontal FDI is probably used more as a substitute for international trade than is vertical FDI.
Ans: True
Dif: M
18. The main thing that keeps an oligopoly from becoming a monopolistic competition is significant barriers to entry.
Ans: True
Dif: M
19. In the year 2000 U.S. multinational firms exported more than $40 billion worth of goods components to Mexico for assembly and eventual resale, with many of the goods eventually being sold in the U.S. at a higher value. This is an example of how NAFTA has hurt both U.S. consumers and producers.
Ans: False
Dif: M
20. A cartel is an example of monopolistic competition.
Ans: False
Dif: E
21. Dell, Gateway, IBM, Apple and HP-Compaq provide the bulk of PC sales in the world. This structure is an example of an oligopoly.
Ans: True
Dif: M
22. Economies of scale can represent a first mover advantage for a firm that is the first to move into a new international market.
Ans: True
Dif: M
23. An oligopoly can act as a monopoly by forming a cartel to constrain output at an artificially high price.
Ans: True
Dif: M
24. Generally speaking, in the short run dumping will always help domestic consumers at the expense of domestic producers.
Ans: True
Dif: M
25. The ratio of the industry sales for the top firms divided by total industry sales is called ther Herfindahl-Hirschman index.
Ans: False
Dif: E
26. The legal and institutional structure that sets the rules for management and corporate behavior is called the industrial organizational structure.
Ans: False
Dif: M
27. The lower the Herfindahl-Hirschman index in an industry the less likely the industry is an oligopoly.
Ans: True
Dif: M
28. The growth of international competition is probably seriously eroding the ability of policymakers to measure industry concentration in a meaningful fashion.
Ans: True
Dif: M
29. Statures designed to achieve the benefits of competition for consumers and producers are call industrial policies.
Ans: False
Dif: E
30. Government policies intended to promote the development of specific national industries are called antitrust policies.
Ans: False
Dif: E
Multiple Choice
1. Dealers in stocks make a profit by charging customers a slightly different price to buy and sell stocks. The difference is called the bid-ask spread. There are only a limited number of dealers for any one stock. Several years ago stock dealers on the NASDAQ stock market apparently colluded to maintain a minimum bid-ask spread buying and selling stock. This is an example of
A) free market capitalism.
B) an oligopoly acting as a cartel.
C) a monopoly restricting output.
D) monopolistic competition.
E) none of the above
Ans: B
Dif: M
2. Which of the following represents inter-industry trade?
I. A country imports Honda automobiles and exports Nissans.
II. A country exports computer chips and then imports the same chips once the DVDs that use the chips.
III. A country buys cheese from the Netherlands and sells airplane parts to Israel.
A) I only
B) II only
C) I and II only
D) III only
E) II and III only
Ans: D
Dif: E
3. It takes a firm three months to adjust employment levels, six months to adjust quantities of raw materials and 18 months to adjust the level of capital investment in a given production process. For this firm, the long run implied in the long run average cost function is _____ months.
A) 6
B) 3
C) 18
D) 27
E) 9
Ans: C
Dif: E
4. In a given month a firm has sales revenue of $10 million on items priced at $100 each, wage costs of $5 million, capital costs of $2 million and overhead expense of $1 million. The firm’s average cost is
A) $0.80.
B) $50.
C) $8.
D) $100.
E) none of the above
Ans: E
Dif: M
5. As a firm gets larger it finds that its long run average costs begin to rise. This firm is experiencing
A) economies of scale.
B) economies of scope.
C) diseconomies of scale.
D) diseconomies of scope.
E) monopolistic competition.
Ans: C
Dif: E
6. Economies of scale can arise because of which of the following?
I. specialization of labor as the firm grows larger
II. fixed costs in the production process
III. increases in the cost of obtaining and processing information about the firm
A) I only
B) II only
C) III only
D) I and II only
E) II and III only
Ans: D
Dif: M
7. Which of the following is likely to have the greatest opportunity to earn positive economic profits?
A) a larger number of firms producing an identical commodity
B) firms offering Internet shopping
C) a grocery store chain in a large town
D) the largest firm in a nearly perfectly competitive industry
E) a firm with a new product protected by a patent
Ans: E
Dif: M
8. Gains from intra-industry trade for producers and consumers primarily arise from
I. a country’s comparative advantage.
II. economies of scale.
III. improvements in product variety.
A) I only
B) II only
C) III only
D) I and II only
E) II and III only
Ans: E
Dif: M
9. Under perfect competition, all firms in the industry sell ______products at ______prices.
A) identical; equal
B) substitutable; equal
C) identical; unequal
D) substitutable; unequal
Ans: A
Dif: E
10. An industry structure with a relatively large number of firms, small entry and exit barriers and similar but not identical products is called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
E) cartel.
Ans: B
Dif: E
11. In a monopolistic competition each firm can
I. set its own price.
II. restrict output to influence the industry price.
III. ignore the actions of competitors.
A) I only
B) II only
C) III only
D) I and II only
E) II and III only
Ans: A
Dif: M
12. In monopolistic competition each firm produces to the point where
A) marginal revenue equals average cost.
B) price equals marginal revenue.
C) price equals average cost.
D) marginal revenue equals marginal cost.
E) average cost equals marginal cost.
Ans: D
Dif: M
13. Suppose that Firm X is earning positive economic profit in a monopolistically competitive industry. We can expect all but which one of the following over time?
A) new firms to enter the industry
B) a decline in economic profits for Firm X
C) a decline in opportunity costs for this industry
D) Firm X’s marginal revenue and demand curves to become more elastic.
E) Firm X’s marginal revenue and demand curves to shift leftward.
Ans: C
Dif: D
NARRBEGIN: Table 1, Firm Y Data
Quantity Output / Price / Total Revenue / TotalCost
300 / $50 / $15,000 / $12,500
400 / $45 / $18,000 / $15,000
500 / $40 / $20,000 / $18,000
600 / $35 / $21,000 / $20,000
700 / $30 / $21,000 / $22,000
Firm Y operates in a monopolistically competitive industry.
NARREND
14. Refer to Table 1 to answer the following question: Firm Y should optimally produce ______units.
A) 300
B) 400
C) 500
D) 600
E) 700
Ans: B
NAR: Table 1 Firm Y Data
Dif: M
15. Refer to Table 1 to answer the following question: At the optimal level of production, Firm Y’s economic profit is
A) $0.
B) $3,000.
C) $1,000.
D) $2,000.
E) $2,500.
Ans: B
NAR: Table 1 Firm Y Data
Dif: M
16. Refer to Table 1 to answer the following question: If new firms enter the industry which of the following changes can we expect?
I. At the given quantities of output, the prices will decline.
II. At the given quantities of output, the differences between the prices will increase.
III. The optimal quantity of output will fall.
A) I only
B) II only
C) III only
D) I and III only
E) I, II and III
Ans: E
NAR: Table 1 Firm Y Data
Dif: D
17. If the price of a firm’s product becomes more elastic, then
A) a smaller increase in price will be sufficient to generate a given increase in total revenue.
B) the firm’s demand curve will be steeper.
C) a given percentage decrease in price will result in a larger percentage decrease in quantity demanded.
D) the firm’s marginal cost curve will become flatter.
E) none of the above
Ans: E
Dif: D
18. All but which one of the following results from engaging in intra-industry international trade?
A) Domestic firms experience economies of scale and are encouraged to increase output.
B) Domestic firms reduce their prices due to competition from foreign imports.
C) Domestic consumers benefit from increased variety and better prices.
D) Foreign residents experience higher prices and reduced variety as more of their goods are exported.
Ans: D
Dif: E
19. Barriers to entry include all but which one of the following?
A) economies of scale in an industry that already has a few large firms
B) ownership or control of key resources needed
C) strong brand loyalty
D) government protection in the form of a patent
E) strong protection from creditors in the event of bankruptcy
Ans: E
Dif: E
20. The ability of a firm to differentiate its product from what the competition offers is a key focus at many firms. If a product is different in the minds of the consumer then the
A) product’s demand curve is more elastic.
B) firm’s demand curve will be less affected by changes in the demand for other products.
C) firm may be able to charge a higher price for its product, ceteris paribus.
D) both A) and C)
E) both B) and C)
Ans: E
Dif: D
21. Which of the following are not considered price takers?
I. firms in a perfectly competitive industry
II. firms in an oligopoly
III. firms in a cartel
IV. a monopoly
A) I only
B) II and III only
C) III and IV only
D) III only