Question

Please answer ALL of the questions below:

1.Under perfect competition without economies of scale, producers are price- (a. makers, b. takers) and the product price is equal to (a. average cost, b. marginal cost, c. marginal revenue). With external economies of scale, producers are price- (a. makers, b. takers) and the product price is equal to (a. average cost, b. marginal cost, c. marginal revenue).

2. All Hondas sold in the US are either imported or produced in Ohio, which is a case of (a. external/ b. internal) economies of scale, while Hollywood is the capital of motion pictures in the US, which is the case of (a. external/ b. internal) economies of scale.

3. Most Scotch whiskey comes from Scotland, while half of the world’s largest aircraft are assembled in Seattle, US. (a. Economies of scale/ b. comparative advantage) is more important in the former case and (a. economies of scale/ b. comparative advantage) is more important in the latter. Hollywood’s cluster location in the US is determined by (a. factor endowments, b. historical accidents), while India’s Bollywood’s cluster location in the world is determined by (a. factor endowments, b. historical accidents).

4. Suppose China and Japan can produce thin-panel PCs and their falling average cost curves are identical. Then, if Japan starts the PC production earlier, China (a. can/ b. cannot) be an exporter of the PCs, and (a. either Japan or China/ b. only Japan/ c. only China/ d. both China and Japan) obtain(s) the benefit of international trade.

Answer 1

Internal economies of scale are firm-specific—or caused internally—while external economies of scale occur based on larger changes outside the firm.

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Q1a) perfectly competitive producers without economies of scale are price takers; a firm can control price only by restricting available market supply, and a competitive firm is too small to have a significant influence in output by restricting its own supply
Q1b) product price equals marginal cost is the ubiqituously well-known equilibrium condition characterizing competitive markets; large number of producers are in fierce competition, cutting prices to the barebones until it can't be brought down any further i.e. price of a unit is just equal to cost of producing just the one more unit
Q1c) with external economies of scale, producers are price setters;
Perfectly competitive markets only achieve productive efficiency if you assume that there are no economies of scale in the industry. With economies of scale of any kind (internal or external), firms have monopolistic market leverage i.e. they have some influence over not just their own quantity but also market price.
Q1d) average cost, with economies of scale AC is downward sloping (because fixed cost distributes over all the units produced) and so firm chooses a level of quantity Q such that market price P = AC

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Q2a) example of external economies of scale; this is an example of external economies of scale from regional externalities
Q2b) example of external economies of scale: Hollywood is the sum of many firms e.g. production studios. The entire Hollywood industry exists in a mesh of positive (and negative) externalities e.g. being in a single town also impliesthey may learn from each other’s production decisions