Question

Please answer ALL of the questions below:

1. Internal economies of scale lead to (a. perfect/ b. imperfect) competition. A monopolist maximizes her profit by setting marginal cost equal to (a. output price/ b. marginal revenue), so that output price is (a. larger than/ b. smaller than/ c. equal to) average cost and monopoly profit is (a. zero/ b. positive/ c. negative). In monopolistic competition, however, an industry contains (a. only one/ b. only few/ c. a lot of) producer(s) of (a. only few/ b. many) differentiated products, who compete each other to make their monopoly profits (a. zero/ b. positive/ c. negative).

2. In monopolistic competition, international trade creates an integrated larger market than domestic ones, which support a (a. larger/ b. smaller) number of firms, each producing at a (a. larger/ b. smaller) scale and (a. higher/ b. lower) average cost. Consumers now have a (a. larger/ b. smaller) variety of products at (a. higher/ b. lower) prices.

3. When firms differ in productivity, international trade causes more productive firms to (a. expand/ b. contract) and least productive ones to (a. enter/ b. exit). Moreover, when there are trade costs, (a. all/ b. only more productive/ c. only less productive) firms can export. Multinational corporations (MNCs) produce overseas when fixed costs on FDI are (a. larger/ b. smaller) than trade costs. The (a. larger/ b. smaller) is their operation, the more likely they choose FDI over exports.

4. Some MNCs replicate their production processes in foreign facilities, i.e. (a. horizontal FDI/ b. vertical FDI), and the other MNCs break down their production chain and shift some parts of the chain in their foreign affiliates, i.e. (a. horizontal FDI/ b. vertical FDI/ c. outsourcing), or independent foreign firms (a. horizontal FDI/ b. vertical FDI/ c. outsourcing). Both vertical FDI and offshoring take advantage of cost differences across locations, so that their welfare implications are similar to those of (a. comparative advantage/ b. economies of scale).

Answer 1

Answer 1.

1. imperfect competition

2. Marginal revenue

3. larger than

4. positive profit

5. a lot of

6. only few

7. Positive

reason- Monopoly produces at MC=MR and earns positive profits as price is greater than average cost.

Monopolistic competitive firm produces at MC= MR. It has many firms and differentiated products.

Answer 2.

1. larger

2. Smaller

3. higher

4. larger

5. lower

reason- when Monopolistic competitive firm opens up for trade there is a large competition and many firms join. each producing smaller quantity at lower price.

Answer 3.

1. Expand

2. exit

3. only more productive

4. smaller

5. larger

reason- more productive firms survive and export while less productive firms exit the Market.

MNC produce overseas when it is cheaper than trading and importing the good.

Answer 4.

1. Horizontal

2. vertical

3. outsourcing

4. comparative advantage

reason- MNCs replicate production in horizontal production process and independent firms in vertical process and outsource.