Recall the model with firm performance differences in a single integrated market

Question

Recall the model with firm performance differences in a single integrated market discussed in the chapter. Now assume that a new technology becomes available. Any firm can adopt the new technology, but its use requires an additional fixed-cost investment. The benefit of the new technology is that it reduces a firm's marginal cost of production by a given amount.

Part A. Could it be profit maximizing for some firms to adopt the new technology but not profit maximizing for other firms to adopt the same technology? Which firms would chose to adopt the new technology? How would they be different from firms that chose not to adopt it.

Assuming that if a firm invests in the technology, it will face a fixed cost T but face a marginal cost cT which is lower than its marginal cost c without the technology,

Answer Choices:

A. the gap c-cT will be larger for a low marginal cost firm than for a higher marginal cost firm

B. The technology is more likely to increase a firms profits when the scale of production decreases

C. A firm with high marginal cost will need a lower level of output to justify the technology than a firm with low margincal cost

D. It is possible that some firms (low cost firms) will chose to adopt the technology while others (high cost firms) do not.

Part B. Now assume that there are also trade cost. In the new equilibrium with both trade cost and technology adoption, firms decide whether to export and also whether to adopt the new technolgy. Would exporting firms be more or less likely to adopt the new technology relative to the non-exporters? why?

A firm that exports faces a (higher/lower) marginal cost than one does not export, and will therefore be (more/less) likely to use this new technolgy.

A. higher, more

B. higher, less

C. lower, more

D. lower, less

Explanation / Answer

Part A) ANS IS C

Firm with high marginal cost will produce less quantity or output compared to firm with large or high marginal cost.

B)ans is D

Firm exports when marginal cost is lower and thefefore be less likely to use this new technology

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