EC271PS2Ans - EC 271 Answers to Problem Set#2 International...

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EC 271 International Economic Relations Answers to Problem Set #2 Prof. Murphy Chapter 6 – Krugman and Obstfeld 1. Cases a and d reflect external economies of scale since concentration of the production of an industry in a few locations reduces the industry’s costs even when the scale of operation of individual firms remains small. External economies need not lead to imperfect competition. The benefits of geographical concentration may include a greater variety of specialized services to support industry operations and larger labor markets or thicker input markets. Cases b and c reflect internal economies of scale and occur at the level of the individual firm. The larger the output of a product by a particular firm, the lower its average costs. This leads to imperfect competition as in petrochemicals, aircraft, and autos. 2. The profit maximizing output level of a monopolist occurs where marginal revenue equals marginal cost. Unlike the case of perfectly competitive markets, under monopoly marginal revenue is not equal to price. Marginal revenue is always less than price under imperfectly competitive markets because to sell an extra unit of output the firm must lower the price of all units, not just the marginal one. 5. There is a typo in some editions of the textbook. The corrected problem should read: (Change to: )….enter an automobile market, or specifically P = 17000 + (150/n), where n represents…. (a) 17,000 + 150/n = 5,000,000,000n/S + 17,000. With S US = 300 million, the number of automakers equals three. With S E = 533 million, the number of automakers equals four. (b) P US = 17,000 + 150/3, P US = $17,050. P E = 17,000 + 150/4, P E = $17,037.50. (c) 17,000 + 150/n = 5,000,000,000n/S + 17,000. With S US+E = 833 million, the number of total automakers now equals five. This helps to explain some of the consolidation that has happened in the industry since trade has become more free in recent decades, e.g. Ford acquiring Jaguar,
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