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Exam 19: Interdependence and the Gains From Trade

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Question 1

True/False

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If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.

A) True
B) False

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True

Question 2

Multiple Choice

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Which of the following statements is true?

A) A self-sufficient country can, at best, consume on its production possibilities frontier.
B) Only countries with an absolute advantage in the production of every good should strive to be self-sufficient.
C) A self-sufficient country consumes outside its production possibilities frontier.
D) Self-sufficiency is the road to prosperity for most countries.

E) A) and B)
F) All of the above

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A

Question 3

Multiple Choice

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Table 1 shows the units of output a worker can produce per month in Australia and Korea. ? $\begin{array}{|l|l|l|}\hline & \text { Food } & \text { Electronics } \\\hline \text { Australia } & 20 & 5 \\\hline \text { Korea } & 8 & 2 \\\hline\end{array}$ Refer to table 1. Korea should

According to the principle of comparative advantage, countries

Table 1 shows the units of output a worker can produce per month in Australia and Korea. ? $\begin{array}{|l|l|l|}\hline & \text { Food } & \text { Electronics } \\\hline \text { Australia } & 20 & 5 \\\hline \text { Korea } & 8 & 2 \\\hline\end{array}$ ? Refer to table 1. Prices of electronics can be stated in terms of units of food. What is the range of prices of electronics for which both countries could gain from trade? The price must be greater than:

Exhibit 3 ​ Refer to Exhibit 3. Government revenue from the tariff is the

Exhibit 2 ​ Refer to Exhibit 2. If trade is not allowed, producer surplus is the

Which of the following statements about import quotas is true?

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, the opportunity cost of 1 watch is

Opportunity costs change as an economy moves along its production possibilities frontier because

If a nation has an absolute advantage in the production of a good it:

Suppose the world price is below the before-trade domestic price for a good. If a country allows free trade in this good,

Table 1 shows the units of output a worker can produce per month in Australia and Korea. ? $\begin{array}{|l|l|l|}\hline & \text { Food } & \text { Electronics } \\\hline \text { Australia } & 20 & 5 \\\hline \text { Korea } & 8 & 2 \\\hline\end{array}$ ? Refer to table 1. Which of the following statements about comparative advantage is true?

Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient and a point that is inefficient. c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy. d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy.

Comparative advantage, not absolute advantage, determines the decision to specialize in production.

Exhibit 2 ​ Refer to Exhibit 2. If free trade is allowed, consumer surplus is the

Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides. a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally? b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides? c. If Diane and Gary have the same opportunity cost of €5 per hour, is there a better solution than for each to specialize in calculating or preparing slides?

If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.

Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?

Tariffs and quotas cause deadweight losses because they raise the price of the imported good and cause over-production and under-consumption of the good in the importing country.