International Economics, 10e (Krugman/Obstfeld/Melitz)
Chapter 7 External Economies of Scale and the International Location of Production
7.1 Economies of Scale and International Trade: An Overview
1) 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.
Answer: A
Page Ref: 146-147
Difficulty: Easy
2) 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.
Answer: A
Page Ref: 146-147
Difficulty: Moderate
3) Why are increasing returns to scale and fixed costs important in models of international
trade and imperfect competition?
Answer: There are many answers. Three of these are
(a) Increasing returns to scale and high fixed costs may be inconsistent with perfect
competition. In such a case, the initial autarkic state may be a suboptimal equilibrium. For
example, relative prices may not equal marginal rates of transformation. It follows from this
that a change in output compositions associated with trade may result in a national welfare for
one or both trading countries that is inferior to that associated with the initial autarkic
conditions. Hence no "gains from trade."
(b) In a case of increasing scale economies at the firm or plant level, the determination of
which product will be exported by which country is ex-ante indeterminate. Therefore,
deriving clear implications concerning the effects of trade on income distributions such as
may be derived from the Samuelson-Stolper Theorem is no longer generally possible.
(c) Market structures containing positive scale economies and imperfect competition may
allow for "two-way trade," or intra-industry trade. As in b. above, the various theorems
derivable from the Heckscher-Ohlin model concerning directions of trade and income
distributions are no longer generally applicable.
Page Ref: 146-147
Difficulty: Difficult
4) If a firm's output doubles when all inputs are doubled, production is said to occur under
conditions of
A) increasing returns to scale.
Chapter 7 External Economies of Scale and the International Location of Production
7.1 Economies of Scale and International Trade: An Overview
1) 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.
Answer: A
Page Ref: 146-147
Difficulty: Easy
2) 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.
Answer: A
Page Ref: 146-147
Difficulty: Moderate
3) Why are increasing returns to scale and fixed costs important in models of international
trade and imperfect competition?
Answer: There are many answers. Three of these are
(a) Increasing returns to scale and high fixed costs may be inconsistent with perfect
competition. In such a case, the initial autarkic state may be a suboptimal equilibrium. For
example, relative prices may not equal marginal rates of transformation. It follows from this
that a change in output compositions associated with trade may result in a national welfare for
one or both trading countries that is inferior to that associated with the initial autarkic
conditions. Hence no "gains from trade."
(b) In a case of increasing scale economies at the firm or plant level, the determination of
which product will be exported by which country is ex-ante indeterminate. Therefore,
deriving clear implications concerning the effects of trade on income distributions such as
may be derived from the Samuelson-Stolper Theorem is no longer generally possible.
(c) Market structures containing positive scale economies and imperfect competition may
allow for "two-way trade," or intra-industry trade. As in b. above, the various theorems
derivable from the Heckscher-Ohlin model concerning directions of trade and income
distributions are no longer generally applicable.
Page Ref: 146-147
Difficulty: Difficult
4) If a firm's output doubles when all inputs are doubled, production is said to occur under
conditions of
A) increasing returns to scale.
