ECON 340 EXAM #2 QUESTIONS WITH VERIFIED
ANSWERS
HW 6 Consider the following statement:
1) More than 1/2 the worlds trade is bilateral trade between developed countries
2) The share of world trade among developing countries is between 10-15%
a) only 1 is true
b) only 2 is true
c) 1 is true and 2 is false
d) both are true
e) both are false - Answers - d) 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 HO models assumed
a) Increasing returns to scale
b) Constant returns to scale
c) Decreasing returns to scale
d) increasing and then decreasing returns to scale - Answers - b) constant returns to
scale
True or false: an industry exhibits increasing returns to scale if average cost decreases
as output increases - Answers - True
What is the difference between internal and external economies of scale?
a) Internal refers to within a firm
b) internal refers to within an industry
c) Internal refers to within a country
d) External refers to between industries
e) External refers to between countries - Answers - a) internal refers to within a firm
Which of these is NOT an assumption of the Krugman model
a) differentiated products
b) increasing returns to scale
c) free entry
,d) perfect competition - Answers - d) perfect competition
If the demand curve faced by an individual firm is downward sloping
a) If it raises price at all, then it loses all of its customers
b) if it raises price at all, then it loses only some of its customers
c) if it lowers price at all, then it captures all consumers in the market
d) if it lowers price at all, then it will not make any profits
e) A and C are true - Answers - b) if it raises price at all, then it loses only some of its
customers
consider the following statement regarding the Krugman model
1) markets are not perfectly competitive
2) producers of each variety will face a horizontal demand curve
a) only (1) is true
b) only (2) is true
c) both are true
d) both are false - Answers - a) only (1) is true
In the equilibrium of the Krugman model
a) industry profits are always zero, because of competition from entry
b) industry profits are above zero, because of monopoly power
c) industry profits are above zero, because price is set above marginal cost
d) industry profits are below zero because of fixed costs
e) (b) and (c) - Answers - a) industry profits are always zero, because of competition
from entry
In an industry with monopolistic competition, if the variable cost in the industry is
constant at c across all firms, then
a) all firms will set prices to c
b) all firms will set marginal revenues to c
c) all firms will set marginal revenue equal to price
d) (a) and (b)
e) none of the above - Answers - b) all firms will set marginal revenues to c
[Graph]
a) depicts an equilibrium in the krugman model, since firms are making positive profits
b) depicts an equilibrium in the HO model
c) depicts the monopolistic pricing decision in the krugman model out of equilibrium,
since firms are making positive profits
d) (a) and (c) are correct
, e) None of the above - Answers - c) depicts the monopolistic pricing decision in the
krugman model out of equilibrium, since firms are making positive profits
In the Krugman model, when firms enter a differentiated product market, all else equal,
exiting firms will experience
a) no change in demand
b) a decline in demand
c) an increase in demand
d) an increase in the fixed cost of operation
e) an increase in the marginal cost of operation - Answers - b) a decline in demand
In the equilibrium of the Krugman model, with free entry and differentiated products,
which equations hold?
a) price = marginal revenue = marginal cost = average cost
b) price = marginal cost ; marginal revenue = average cost
c) price = average cost ; marginal revenue = marginal cost
d) price = marginal revenue ; marginal cost = average cost - Answers - c) price =
average cost; marginal revenue = marginal cost
True or false: in the Krugman model, greater variety leads to higher welfare for all
consumers - Answers - True
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
e) (b) or (d) - Answers - e) (b) or (d)
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 [ ] (hint: recall
that domestic varieties are those produced domestically, and entry and exit refer
specifically to the decision to produce, NOT import or export)
ANSWERS
HW 6 Consider the following statement:
1) More than 1/2 the worlds trade is bilateral trade between developed countries
2) The share of world trade among developing countries is between 10-15%
a) only 1 is true
b) only 2 is true
c) 1 is true and 2 is false
d) both are true
e) both are false - Answers - d) 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 HO models assumed
a) Increasing returns to scale
b) Constant returns to scale
c) Decreasing returns to scale
d) increasing and then decreasing returns to scale - Answers - b) constant returns to
scale
True or false: an industry exhibits increasing returns to scale if average cost decreases
as output increases - Answers - True
What is the difference between internal and external economies of scale?
a) Internal refers to within a firm
b) internal refers to within an industry
c) Internal refers to within a country
d) External refers to between industries
e) External refers to between countries - Answers - a) internal refers to within a firm
Which of these is NOT an assumption of the Krugman model
a) differentiated products
b) increasing returns to scale
c) free entry
,d) perfect competition - Answers - d) perfect competition
If the demand curve faced by an individual firm is downward sloping
a) If it raises price at all, then it loses all of its customers
b) if it raises price at all, then it loses only some of its customers
c) if it lowers price at all, then it captures all consumers in the market
d) if it lowers price at all, then it will not make any profits
e) A and C are true - Answers - b) if it raises price at all, then it loses only some of its
customers
consider the following statement regarding the Krugman model
1) markets are not perfectly competitive
2) producers of each variety will face a horizontal demand curve
a) only (1) is true
b) only (2) is true
c) both are true
d) both are false - Answers - a) only (1) is true
In the equilibrium of the Krugman model
a) industry profits are always zero, because of competition from entry
b) industry profits are above zero, because of monopoly power
c) industry profits are above zero, because price is set above marginal cost
d) industry profits are below zero because of fixed costs
e) (b) and (c) - Answers - a) industry profits are always zero, because of competition
from entry
In an industry with monopolistic competition, if the variable cost in the industry is
constant at c across all firms, then
a) all firms will set prices to c
b) all firms will set marginal revenues to c
c) all firms will set marginal revenue equal to price
d) (a) and (b)
e) none of the above - Answers - b) all firms will set marginal revenues to c
[Graph]
a) depicts an equilibrium in the krugman model, since firms are making positive profits
b) depicts an equilibrium in the HO model
c) depicts the monopolistic pricing decision in the krugman model out of equilibrium,
since firms are making positive profits
d) (a) and (c) are correct
, e) None of the above - Answers - c) depicts the monopolistic pricing decision in the
krugman model out of equilibrium, since firms are making positive profits
In the Krugman model, when firms enter a differentiated product market, all else equal,
exiting firms will experience
a) no change in demand
b) a decline in demand
c) an increase in demand
d) an increase in the fixed cost of operation
e) an increase in the marginal cost of operation - Answers - b) a decline in demand
In the equilibrium of the Krugman model, with free entry and differentiated products,
which equations hold?
a) price = marginal revenue = marginal cost = average cost
b) price = marginal cost ; marginal revenue = average cost
c) price = average cost ; marginal revenue = marginal cost
d) price = marginal revenue ; marginal cost = average cost - Answers - c) price =
average cost; marginal revenue = marginal cost
True or false: in the Krugman model, greater variety leads to higher welfare for all
consumers - Answers - True
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
e) (b) or (d) - Answers - e) (b) or (d)
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 [ ] (hint: recall
that domestic varieties are those produced domestically, and entry and exit refer
specifically to the decision to produce, NOT import or export)
