.
Page
.
, Chapter 5
How is the opening up of trade and investment between
How is the opening up of trade and investment between eastern and western Europe likely to
affect the location of industries within Europe that have (a) substantial economies of scale; (b)
little or no economies of scale?
Answer
(a) Given that production will take place in only one or two plants, new plants will tend to be
located near to the centre of the new enlarged market (i.e. further to the east than before in
the case of western European companies).
(b) Plants will still tend to be scattered round Europe, given that the customers are scattered.
These effects will be the result of attempts to minimise transport costs and thus will be more
significant the higher are transport costs per kilometre.
, Chapter 5
. Name some industries where external economies of scale are gained. What are the specific external
economies in each case?
Answer
Two examples are:
• Financial services: pool of qualified and experienced labour, access to specialist software, one
firm providing specialist services to another.
• Various parts of the engineering industry: pool of qualified and experienced labour, access to
specialist suppliers, possible joint research, specialised banking services.
Would you expect external economies to be associated with the concentration of an industry in a
particular region?
Answer
Yes. There may be a common transport and communications infrastructure that can be used;
there is likely to be a pool of trained and experienced labour in the area; joint demand may be
high enough to allow economies of scale to be experienced in the supply of some locally
extracted raw material.
, Chapter 5
If factor X costs twice as much as factor Y (Px/Py = 2), what can be said about the relationship between
the MPPs of the two factors if the optimum combination of factors is used?
Answer
MPPx/MPPy = 2. The reason is that if MPPx/Px = MPPy/Py, then, by rearranging the terms of the
equation, MPPx/MPPy must equal Px/Py (= 2).
. Could isoquants ever
cross? Answer
Not for a given state of technology, otherwise it would mean that at one side of the intersection
the higher output isoquant would be ‘south-west’ of the lower output isoquant. This would
mean that a higher output could be achieved by using less of both factors of production!
Could they ever slope upward to the right? Explain your answers.
Answer
Yes. It would mean that one of the two factors had a negative marginal productivity that was
greater than the positive marginal productivity of the other: i.e. that MPPa/MPPb (or MPPb/MPPa)
was negative (a negative marginal rate of factor substitution).
This situation will occur when so much is used of one factor that diminishing returns have
become so great as to produce substantial negative marginal productivity: isoquants will bend
back on themselves beyond the points where they become vertical or horizontal. The firm,
however, will not produce along this portion of an isoquant, because the price ratio (Pa/Pb) will
(virtually) never be negative: (but see Box 5.5 on the price of Christmas trees on Christmas Eve,
when it might be better for a shop to pay people to take them away – a negative price!).
. What will happen to an isocost if the prices of both factors rise by the same percentage?
Answer
It will shift inwards parallel to the old isocost.
. What will happen to the isocost of Figure 5.8 if the wage rate rises to £15 000?
Answer
It will pivot inwards round the point where it crosses the vertical axis. It will now cross the
horizontal axis at 20L. Its slope will now be £15 000/£20 000: i.e. PL/PK.
Why are Christmas trees and fresh foods often sold cheaply on Christmas Eve?
Page
.
, Chapter 5
How is the opening up of trade and investment between
How is the opening up of trade and investment between eastern and western Europe likely to
affect the location of industries within Europe that have (a) substantial economies of scale; (b)
little or no economies of scale?
Answer
(a) Given that production will take place in only one or two plants, new plants will tend to be
located near to the centre of the new enlarged market (i.e. further to the east than before in
the case of western European companies).
(b) Plants will still tend to be scattered round Europe, given that the customers are scattered.
These effects will be the result of attempts to minimise transport costs and thus will be more
significant the higher are transport costs per kilometre.
, Chapter 5
. Name some industries where external economies of scale are gained. What are the specific external
economies in each case?
Answer
Two examples are:
• Financial services: pool of qualified and experienced labour, access to specialist software, one
firm providing specialist services to another.
• Various parts of the engineering industry: pool of qualified and experienced labour, access to
specialist suppliers, possible joint research, specialised banking services.
Would you expect external economies to be associated with the concentration of an industry in a
particular region?
Answer
Yes. There may be a common transport and communications infrastructure that can be used;
there is likely to be a pool of trained and experienced labour in the area; joint demand may be
high enough to allow economies of scale to be experienced in the supply of some locally
extracted raw material.
, Chapter 5
If factor X costs twice as much as factor Y (Px/Py = 2), what can be said about the relationship between
the MPPs of the two factors if the optimum combination of factors is used?
Answer
MPPx/MPPy = 2. The reason is that if MPPx/Px = MPPy/Py, then, by rearranging the terms of the
equation, MPPx/MPPy must equal Px/Py (= 2).
. Could isoquants ever
cross? Answer
Not for a given state of technology, otherwise it would mean that at one side of the intersection
the higher output isoquant would be ‘south-west’ of the lower output isoquant. This would
mean that a higher output could be achieved by using less of both factors of production!
Could they ever slope upward to the right? Explain your answers.
Answer
Yes. It would mean that one of the two factors had a negative marginal productivity that was
greater than the positive marginal productivity of the other: i.e. that MPPa/MPPb (or MPPb/MPPa)
was negative (a negative marginal rate of factor substitution).
This situation will occur when so much is used of one factor that diminishing returns have
become so great as to produce substantial negative marginal productivity: isoquants will bend
back on themselves beyond the points where they become vertical or horizontal. The firm,
however, will not produce along this portion of an isoquant, because the price ratio (Pa/Pb) will
(virtually) never be negative: (but see Box 5.5 on the price of Christmas trees on Christmas Eve,
when it might be better for a shop to pay people to take them away – a negative price!).
. What will happen to an isocost if the prices of both factors rise by the same percentage?
Answer
It will shift inwards parallel to the old isocost.
. What will happen to the isocost of Figure 5.8 if the wage rate rises to £15 000?
Answer
It will pivot inwards round the point where it crosses the vertical axis. It will now cross the
horizontal axis at 20L. Its slope will now be £15 000/£20 000: i.e. PL/PK.
Why are Christmas trees and fresh foods often sold cheaply on Christmas Eve?
