ECON 340 EXAM 2 QUESTIONS WITH VERIFIED
ANSWERS
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%
A Only (i) is true
B Only (ii) is true
C (i) is true and (ii) is false
D Both are true
E Both are false - Answers - Both are true
True or False: Most world trade is inter-industry trade.
A True
B False - 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.
A True
B False - Answers - False
The Ricardian and H-O 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 - Constant returns to scale
True or False: An industry exhibit increasing returns to scale if average costs decreases
as output increases
A True
B False - Answers - True
Technology can exhibit IRS due to
A Internal factors only
B External factors only
C Both internal and external factors
D It is independent of these factors - Answers - Both internal and external factors
What is the technical meaning of "economies of scale"?
A Average cost decreases as output decreases
B Average cost decreases as output increases
C Average cost increases as output decreases
,D Average cost increases as output increases - Answers - Average cost decreases as
output increases
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 - Internal refers to within a firm
Which of these is not an assumption of the Krugman New Trade Model
A Differentiated Products
B Increasing Returns to Scale
C Free Entry
D Perfect Competition - Answers - Perfect Competition
(An) Important ingredient(s) of the monopolistic competition model is (are):
A Product differentiation
B Perfect competition
C External economies of scale
D (a) and (b)
E All of the above - Answers - Product differentiation
If the demand curve faced by an individual firm downward sloping, then
A If it raises its price at all, then it loses all of its customers
B If it raises its price at all, then it loses only some of its customers
C If it lowers its price at all, then it captures all consumers in the market
D If it lowers its price at all, then it will not make any profits
E (A) and (C) are true - 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
A Only (i) is true
B Only (ii) is true
C Both are true
D Both are false - Answers - Only (i) is true
In 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 - industry profits are always zero, because of competition from
entry
, In the Krugman model, producers pays
A A variable cost to enter the market
B A fixed cost to enter the market
C No cost to enter the market
D Fixed cost to exit the market - Answers - A fixed cost to enter the market
How do firms set quantities sold in a monopolistic competition framework?
A Where Price = Marginal Cost
B Where Price = Average Cost
C Where Marginal Revenue = Marginal Cost
D Where Marginal Revenue = Price - 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
A all firms will all set prices to c
B all firms will all 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 - all firms will all set marginal revenues to c
Figure 1
A Depicts an equilibrium in the Krugman model, since firms are making positive profits
B Depicts an equilibrium in the Heckscher-Ohlin model
C Depicts the monopolistic pricing decision in the Krugman model
D (A) and (C) are correct - Answers - Depicts the monopolistic pricing decision in the
Krugman model
What does the assumption of "free entry" mean?
A Firms do not have to pay a fixed cost to trade
B Firms do not have to pay import tariffs
C Firms are complete free to enter a market or leave
D Firms do not affect the demand of other firms - 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
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 - A decline in demand
True or False: In equilibrium in the Krugman model, firms make positive profits.
A True
ANSWERS
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%
A Only (i) is true
B Only (ii) is true
C (i) is true and (ii) is false
D Both are true
E Both are false - Answers - Both are true
True or False: Most world trade is inter-industry trade.
A True
B False - 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.
A True
B False - Answers - False
The Ricardian and H-O 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 - Constant returns to scale
True or False: An industry exhibit increasing returns to scale if average costs decreases
as output increases
A True
B False - Answers - True
Technology can exhibit IRS due to
A Internal factors only
B External factors only
C Both internal and external factors
D It is independent of these factors - Answers - Both internal and external factors
What is the technical meaning of "economies of scale"?
A Average cost decreases as output decreases
B Average cost decreases as output increases
C Average cost increases as output decreases
,D Average cost increases as output increases - Answers - Average cost decreases as
output increases
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 - Internal refers to within a firm
Which of these is not an assumption of the Krugman New Trade Model
A Differentiated Products
B Increasing Returns to Scale
C Free Entry
D Perfect Competition - Answers - Perfect Competition
(An) Important ingredient(s) of the monopolistic competition model is (are):
A Product differentiation
B Perfect competition
C External economies of scale
D (a) and (b)
E All of the above - Answers - Product differentiation
If the demand curve faced by an individual firm downward sloping, then
A If it raises its price at all, then it loses all of its customers
B If it raises its price at all, then it loses only some of its customers
C If it lowers its price at all, then it captures all consumers in the market
D If it lowers its price at all, then it will not make any profits
E (A) and (C) are true - 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
A Only (i) is true
B Only (ii) is true
C Both are true
D Both are false - Answers - Only (i) is true
In 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 - industry profits are always zero, because of competition from
entry
, In the Krugman model, producers pays
A A variable cost to enter the market
B A fixed cost to enter the market
C No cost to enter the market
D Fixed cost to exit the market - Answers - A fixed cost to enter the market
How do firms set quantities sold in a monopolistic competition framework?
A Where Price = Marginal Cost
B Where Price = Average Cost
C Where Marginal Revenue = Marginal Cost
D Where Marginal Revenue = Price - 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
A all firms will all set prices to c
B all firms will all 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 - all firms will all set marginal revenues to c
Figure 1
A Depicts an equilibrium in the Krugman model, since firms are making positive profits
B Depicts an equilibrium in the Heckscher-Ohlin model
C Depicts the monopolistic pricing decision in the Krugman model
D (A) and (C) are correct - Answers - Depicts the monopolistic pricing decision in the
Krugman model
What does the assumption of "free entry" mean?
A Firms do not have to pay a fixed cost to trade
B Firms do not have to pay import tariffs
C Firms are complete free to enter a market or leave
D Firms do not affect the demand of other firms - 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
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 - A decline in demand
True or False: In equilibrium in the Krugman model, firms make positive profits.
A True
