Practice Questions - Economies of Scale
ECON-430 International Trade
1. Why do countries specialize and trade?
2. What are external economies of scale? What do external economies of scale imply about firm location?
What may be the source(s) of external economies?
3. If an industry is characterized by external economies of scale and the world consists of two countries with
identical technology and factor endowments, will trade occur? If so, determine and describe the pattern of
trade.
4. In the presence of external economies of scale, in what sense is the pattern of trade indeterminate?
5. In the presence of external economies of scale, what can you say about the gains from trade?
6. What are internal economies of scale? What do internal economies of scale imply about market struc-
ture? What is monopolistic competition? Depict graphically a monopolistically competitive firm’s optimal
production level and price. Depict graphically a monopolistically competitive firm that is making profit -
indicate profit. Depict graphically a monopolistically competitive firm that is making 0 profit.
6. Consider a Heckscher-Ohlin world, but suppose that the Xindustry is monopolistically competitive.
What two types of trade will be observed? What can you say about the pattern of trade? How will gains
from trade manifest? Graphically depict an autarky equilibrium for a firm and a free trade equilibrium -
provide a narrative to explain your diagram.
7. Under what conditions would you expect intraindustry/interindustry trade to dominate trade patterns?
Empirically, intraindustry trade is significant. Why might this significance matter?
8. What is dumping?
9. Consider a firm that charges a lower price for exported goods than it does for the same good sold
domestically. Specify the firm’s problem. Find its solution. Illustrate the solution graphically. How is
elasticity related to the firm’s price choices?
