ECON 340 LECTURE 6 HOMEWORK 6 EXAMN QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026

ECON 340 LECTURE 6 HOMEWORK 6 EXAMN QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026 Consider the following statement i) More than ½ of the world's trade is bilateral trade between developed countries ii) The share of world trade among developing countries is between 10-15% - Answers Both are true True or False: Most world trade is inter-industry trade. - Answers false True or False: Cross country difference in autarky prices can explain why fully assembled cars are imported to the US from Mexico as well as exported to Mexico from the US. - Answers false The Ricardian and H-O models assumed - Answers Constant returns to scale True or False: An industry exhibit increasing returns to scale if average costs decreases as output increases - Answers True Technology can exhibit IRS due to - Answers Both internal and external factors What is the technical meaning of "economies of scale"? - Answers Average cost decreases as output increases What is the difference between internal and external economies of scale? - Answers Internal refers to within a firm Which of these is not an assumption of the Krugman New Trade Model - Answers Perfect Competition (An) Important ingredient(s) of the monopolistic competition model is (are): - Answers Product differentiation If the demand curve faced by an individual firm downward sloping, then - Answers If it raises its price at all, then it loses only some of its customers Consider the following statement regarding the Krugman Model i) Markets are not perfectly competitive ii) Producers of each variety will have horizontal demand curve - Answers Only (i) is true In the Krugman model, - Answers industry profits are always zero, because of competition from entry In the Krugman model, producers pays - Answers A fixed cost to enter the market How do firms set quantities sold in a monopolistic competition framework? - Answers Where Marginal Revenue = Marginal Cost In an industry with monopolistic competition, if the variable cost in the industry is constant at c across all firms, then - Answers all firms will all set marginal revenues to c question 19 on top hat - Answers What does the assumption of "free entry" mean? - Answers Firms are complete free to enter a market or leave In the Krugman model, when additional firms enter a differentiated product market, existing firms will experience - Answers A decline in demand True or False: In equilibrium in the Krugman model, firms make positive profits. - Answers False With free entry and differentiated products, which equations hold? - Answers Price = Average Cost; Marginal Revenue = Marginal Cost True or False: In Krugman model, greater variety leads to higher welfare. - Answers True In the Krugman model, which of the following changes would result in an increase in product variety? - Answers In the Krugman model, which of the following changes would result in an increase in product variety? A Increase in fixed costs B Decrease in fixed costs C Increase in marginal cost D Decrease in marginal costs - Answers B AND D decrease in fixed cost decrease in marginal cost In the Krugman model, the equilibrium number of firms is determined by the A Variable cost B Fixed cost C Size of market D (a) and (b) E All of the above affect the equilibrium number of firms - Answers E- All of the above affect the equilibrium number of firms In the Krugman model, when opening to trade, in each market, some domestic varieties [ ]. The overall number of varieties available to consumers in that market [ ]. - Answers Exit; increase In the Krugman model, the autarky equilibrium number of firms is determined by A Fixed cost B market size C Marginal cost D (a) and (b) E All of the above affect the equilibrium number of firms - Answers E All of the above affect the equilibrium number of firms In the Krugman model, opening to trade - Answers Always increases welfare for all agents In the Krugman model, opening to trade - Answers Always increases welfare. This is a direct result of the total number of varieties available to consumers increasing In the Krugman model, how does trade affect firms? - Answers Trade acts like an expansion of the market In the Krugman model, in the autarky equilibrium, - Answers consumers in larger countries are better off After trade, the number of local varieties - Answers decrease In the Krugman model, which assumption is necessary for intra-industry trade to occur? - Answers Imperfect competition What industries will be more likely to have greater levels of intra-industry trade? A Skill Intensive industries with significant R&D expenditures and patents. B Capital Intensive industries where initial major outlays are necessary for production. C Labor Intensive industries. D (a) and (b) E (a) and (c) - Answers (a) and (b) Which industry is least likely to have intra-industry trade? - Answers Agriculture (farming) What aspect of world trade does the Krugman "New Trade" model describe? - Answers Why similar countries undertake intra-industry trade