Advantage - The Driving Force of Specialization Answer Key (Sec 2)

Interdependence and the Gains from Trade - Comparative Advantage: The Driving Force of Specialization MULTIPLE CHOICE 1. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then which of these pairs of points could be on the United States' production possibilities frontier? a. b. c. d. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars) (200 airplanes, 10,000 cars) and (150 airplanes, 20,000 cars) (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars) (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars) ANS: C 2. Assume for Namibia that the opportunity cost of each hut is 200 bowls. Then which of these pairs of points could be on Namibia's production possibilities frontier? a. b. c. d. (200 huts, 30,000 bowls) and (150 huts, 35,000 bowls) (200 huts, 40,000 bowls) and (150 huts, 30,000 bowls) (300 huts, 50,000 bowl) and (200 huts, 60,000 bowls) (300 huts, 60,000 bowls) and (200 huts, 80,000 bowls) ANS: D 3. What must be given up to obtain an item is called a. b. c. d. out-of-pocket cost. comparative worth. opportunity cost. absolute value. ANS: C 4. The opportunity cost of an item is a. b. c. d. the number of hours that one must work in order to buy one unit of the item. what you give up to get that item. always less than the dollar value of the item. always greater than the cost of producing the item. ANS: B 5. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer’s opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton a. b. c. d. ANS: C is equal to 0. is between 0 and 1. is equal to 1. is greater than 1. 6. If Korea is capable of producing either shoes or soccer balls or some combination of the two, then a. b. c. d. ANS: D 7. Korea should specialize in the product in which it has an absolute advantage. it would be impossible for Korea to have an absolute advantage over another country in both products. it would be difficult for Korea to benefit from trade with another country if Korea is efficient in the production of both goods. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls. Suppose a gardener produces both green beans and corn in her garden. If she must give up 14 bushels of corn to get 5 bushels of green beans, then her opportunity cost of 1 bushel of green beans is a. b. c. d. 0.36 bushel of corn. 2.8 bushels of corn. 14 bushels of corn. 70 bushels of corn. ANS: B 8. Suppose a gardener produces both green beans and corn in her garden. If the opportunity cost of one bushel of corn is 3/5 bushel of green beans, then the opportunity cost of 1 bushel of green beans is a. b. c. d. 3/5 bushel of corn. 5/3 bushels of corn. 3 bushels of corn. 5 bushels of corn. ANS: B 9. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 chair is a. b. c. d. 1/5 table for Mike and 1/3 table for Sandy. 1/5 table for Mike and 3 tables for Sandy. 5 tables for Mike and 1/3 table for Sandy. 5 tables for Mike and 3 tables for Sandy. ANS: A 10. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 table is a. b. c. d. ANS: D 1/5 chair for Mike and 1/3 chair for Sandy. 1/5 chair for Mike and 3 chairs for Sandy. 5 chairs for Mike and 1/3 chair for Sandy. 5 chairs for Mike and 3 chairs for Sandy. 11. If he devotes all of his available resources to cantaloupe production, a farmer can produce 120 cantaloupes. If he sacrifices 1.5 watermelons for each cantaloupe that he produces, it follows that a. b. c. d. if he devotes all of his available resources to watermelon production, then he can produce 80 watermelons. he cannot have a comparative advantage over other farmers in producing cantaloupes. his opportunity cost of one watermelon is 2/3 of a cantaloupe. his production possibilities frontier is bowed-out. ANS: C 12. Absolute advantage is found by comparing different producers’ a. b. c. d. opportunity costs. payments to land, labor, and capital. input requirements per unit of output. locational and logistical circumstances. ANS: C 13. The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good, a. b. c. d. has a low opportunity cost of producing that good, relative to the opportunity costs of other producers. has a comparative advantage in the production of that good. has an absolute advantage in the production of that good. should be the only producer of that good. ANS: C 14. If Shawn can produce more donuts in one day than Sue can produce in one day, then a. b. c. d. Shawn has a comparative advantage in the production of donuts. Sue has a comparative advantage in the production of donuts. Shawn has an absolute advantage in the production of donuts. Sue has an absolute advantage in the production of donuts. ANS: C 15. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that a. b. c. d. ANS: A Mike has an absolute advantage in chairs. Mike has a comparative advantage in tables. Sandy has an absolute advantage in chairs. Sandy has a comparative advantage in chairs. 16. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours or he can trim a tree in two hours. a. b. c. d. Travis has an absolute advantage over Ricardo in trimming trees. Travis has a comparative advantage over Ricardo in mowing lawns. Ricardo has a comparative advantage over Travis in trimming trees. All of the above are correct. ANS: A 17. Suppose Susan can wash three windows per hour or she can iron six shirts per hour. Paul can wash two windows per hour or he can iron five shirts per hour. a. b. c. d. Susan has an absolute advantage over Paul in washing windows. Susan has a comparative advantage over Paul in washing windows. Paul has a comparative advantage over Susan in ironing shirts. All of the above are correct. ANS: D 18. Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the following is not possible? a. b. c. d. Jim has an absolute advantage in the production of baseball bats and in the production of hockey sticks. Jim has an absolute advantage in the production of baseball bats and a comparative advantage in the production of hockey sticks. Jim has an absolute advantage in the production of hockey sticks and a comparative advantage in the production of baseball bats. Jim has a comparative advantage in the production of baseball bats and in the production of hockey sticks. ANS: D 19. Kelly and David are both capable of repairing cars and cooking meals. Which of the following scenarios is not possible? a. b. c. d. Kelly has a comparative advantage in repairing cars and David has a comparative advantage in cooking meals. Kelly has an absolute advantage in repairing cars and David has an absolute advantage in cooking meals. Kelly has a comparative advantage in repairing cars and in cooking meals. David has an absolute advantage in repairing cars and in cooking meals. ANS: C 20. Suppose Jim and Tom can both produce baseball bats. If Jim’s opportunity cost of producing baseball bats is lower than Tom’s opportunity cost of producing baseball bats, then a. b. c. d. ANS: D Tom must have an absolute advantage in the production of baseball bats. Jim must have an absolute advantage in the production of baseball bats. Tom has a comparative advantage in the production of baseball bats. Jim has a comparative advantage in the production of baseball bats. 21. If Shawn can produce donuts at a lower opportunity cost than Sue, then a. b. c. d. Shawn has a comparative advantage in the production of donuts. Sue has a comparative advantage in the production of donuts. Shawn should not produce donuts. Shawn is capable of producing more donuts than Sue in a given amount of time. ANS: A 22. If Iowa’s opportunity cost of corn is lower than Oklahoma’s opportunity cost of corn, then a. b. c. d. Iowa has a comparative advantage in the production of corn. Iowa has an absolute advantage in the production of corn. Iowa should import corn from Oklahoma. Oklahoma should produce just enough corn to satisfy its own residents’ demands. ANS: A 23. Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage in producing wheat if a. b. c. d. Canada requires fewer resources than the U.S. to produce a bushel of wheat. the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S. the opportunity cost of producing a bushel of wheat is lower for the U.S. than it is for Canada. the U.S. has an absolute advantage over Canada in producing computer software. ANS: B 24. Comparative advantage is related most closely to which of the following? a. b. c. d. output per hour opportunity cost efficiency bargaining strength in international trade ANS: B 25. For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to a. b. c. d. have a comparative advantage in both activities. have an absolute advantage in both activities. be more productive per unit of time in both activities. gain from trade with each other. ANS: A 26. Two individuals engage in the same two productive activities. In which of the following circumstances would neither individual have a comparative advantage in either activity? a. b. c. d. ANS: C One individual’s production possibilities frontier is steeper than the other individual’s production possibilities frontier. One individual is faster at both activities than the other individual. One individual’s opportunity costs are the same as the other individual’s opportunity costs. None of the above is correct; one of the two individuals always will have a comparative advantage in at least one of the two activities. 27. Which of the following statements about comparative advantage is not true? a. b. c. d. Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources. The principle of comparative advantage applies to countries as well as to individuals. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade. A country may have a comparative advantage in producing a good, even though it lacks an absolute advantage in producing that good. ANS: A 28. The principle of comparative advantage does not provide answers to certain questions. One of those questions is a. b. c. d. Do specialization and trade benefit more than one party to a trade? Is it absolute advantage or comparative advantage that really matters? How are the gains from trade shared among the parties to a trade? Is it possible for specialization and trade to increase total output of traded goods? ANS: C 29. The principle of comparative advantage does not provide answers to certain questions. One of those questions is a. b. c. d. Is it possible for specialization and trade to benefit more than one party to a trade? Is it possible for specialization and trade to increase total output of traded goods? Do opportunity costs play a role in people’s decisions to specialize in certain activities? What determines the price at which trade takes place? ANS: D 30. Which of the following is not correct? a. b. c. d. The producer who requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good. The gains from specialization and trade are based not on comparative advantage but on absolute advantage. ANS: D 31. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Which of the following statements is true? a. b. c. d. ANS: C Both countries could gain from trade with each other. Neither country could gain from trade with each other because Cornland has an absolute advantage in both goods. Neither country could gain from trade with each other because neither one has a comparative advantage. Oatland could gain from trade between the two countries, but Cornland definitively would lose. 32. Suppose that the country of Xenophobia chose to isolate itself from the rest of the world. Its ruler proclaimed that Xenophobia should become self-sufficient, so it would not engage in foreign trade. From an economic perspective, this idea would a. b. c. d. make sense if Xenophobia had an absolute advantage in all goods. make sense if Xenophobia had no absolute advantages in any good. not make sense as long as Xenophobia had a comparative advantage in some good. not make sense as long as Xenophobia had an absolute advantage in at least half the goods that could be traded. ANS: C 33. Specialization and trade are closely linked to a. b. c. d. absolute advantage. comparative advantage. gains to some traders that exactly offset losses to other traders. shrinkage of the economic pie. ANS: B 34. When each person specializes in producing the good in which he or she has a comparative advantage, total production in the economy a. b. c. d. falls. stays the same. rises. may fall, rise, or stay the same. ANS: C 35. Total output in an economy increases when each person specializes because a. b. c. d. there is less competition for the same resources. each person spends more time producing that product in which he or she has a comparative advantage. a wider variety of products will be produced within each country due to specialization. government necessarily plays a larger role in the economy due to specialization. ANS: B 36. Which of the following statements is not correct? a. b. c. d. ANS: D Trade allows for specialization. Trade has the potential to benefit all nations. Trade allows nations to consume outside of their production possibilities curves. Absolute advantage is the driving force of specialization. 37. Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then a. b. c. d. the two countries’ combined output of both goods will be higher than it would be in the absence of trade. Greece will produce more fish than it would produce in the absence of trade. Germany will produce more cars than it would produce in the absence of trade. All of the above are correct. ANS: D 38. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year and a worker in Teeveeland can produce either 2 radios or 5 televisions per year. Each nation has 100 workers, and each country specializes according to the principle of comparative advantage. If Radioland trades 100 televisions to Teeveeland in exchange for 100 radios each year, then each country's maximum consumption of new radios and televisions per year will be a. b. c. d. higher than it would be in the absence of trade because of the gains from trade. the same as it would be in the absence of trade. less than it would be in the absence of trade because neither country is specializing in the product in which it has a comparative advantage. less than it would be in the absence of trade because Teeveeland has an absolute advantage in both goods and so it cannot benefit by trading with Radioland. ANS: C 39. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a worker in Teeveeland can produce either 2 radios or 4 televisions per year. Each nation has 100 workers. Also suppose that each country completely specializes in producing the good in which it has a comparative advantage. If Radioland trades 100 radios to Teeveeland in exchange for 100 televisions each year, then each country's maximum consumption of new radios and televisions per year will be a. b. c. d. 100 radios, 300 televisions in Radioland and 300 radios, 100 televisions in Teeveeland. 300 radios, 100 televisions in Radioland and 100 radios, 300 televisions in Teeveeland. 200 radios, 100 televisions in Radioland and 100 radios, 200 televisions in Teeveeland. 300 radios, 100 televisions in Radioland and 100 radios, 400 televisions in Teeveeland. ANS: B 40. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. Suppose that trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Freedonia will now be able to consume a maximum of a. b. c. d. ANS: A 30 units of corn and 30 units of wheat. 40 units of corn and 30 units of wheat. 40 units of corn and 20 units of wheat. 10 units of corn and 40 units of wheat. 41. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. Suppose that trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Sylvania will now be able to consume a maximum of a. b. c. d. 30 units of corn and 30 units of wheat. 40 units of corn and 30 units of wheat. 40 units of corn and 20 units of wheat. 10 units of corn and 40 units of wheat. ANS: A 42. Suppose that a worker in Agland can produce either 10 units of organic grain or 2 units of incense per year, and a worker in Zenland can produce either 5 units of organic grain or 15 units of incense per year. There are 20 workers in Agland and 10 workers in Zenland. Currently the two countries do not trade. Agland produces and consumes 100 units of grain and 20 units of incense per year. Zenland produces and consumes 50 units of grain and no incense per year. If each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by a. b. c. d. 30 units of grain and 100 units of incense. 30 units of grain and 150 units of incense. 50 units of grain and 90 units of incense. 50 units of grain and 130 units of incense. ANS: D 43. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. If the two countries do not trade, Cornland will produce and consume 400 bushels of corn and 100 bushels of oats, while Oatland will produce and consume 60 bushels of corn and 400 bushels of oats. If each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by a. b. c. d. ANS: B 280 bushels of corn and 450 bushels of oats. 340 bushels of corn and 500 bushels of oats. 360 bushels of corn and 520 bushels of oats. 360 bushels of corn and 640 bushels of oats. 44. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. For many years the two countries traded, each completely specializing according to their respective comparative advantages. Now, however, war has broken out between them and all trade has stopped. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. The war has caused the combined yearly output of the two countries to decline by a. b. c. d. 10 units of corn and 10 units of wheat. 20 units of corn and 20 units of wheat. 30 units of corn and 30 units of wheat. 40 units of corn and 40 units of wheat. ANS: B 45. Suppose that a worker in Caninia can produce either 2 blankets or 8 meals per day, and a worker in Felinia can produce either 5 blankets or 1 meal per day. Each nation has 10 workers. For many years, the two countries traded, each completely specializing according to their respective comparative advantages. Now war has broken out between them and all trade has stopped. Without trade, Caninia produces and consumes 10 blankets and 40 meals per day and Felinia produces and consumes 25 blankets and 5 meals per day. The war has caused the combined daily output of the two countries to decline by a. b. c. d. 15 blankets and 35 meals. 25 blankets and 40 meals. 35 blankets and 45 meals. 50 blankets and 80 meals. ANS: A 46. Two people can benefit from specialization and trade by obtaining a good at a price that is a. b. c. d. lower than his or her opportunity cost of that good. the same as his or her opportunity cost of that good. higher than his or her opportunity cost of that good. different than his or her opportunity cost of that good. ANS: A 47. The gains from trade are a. b. c. d. evident in economic models, but seldom observed in the real world. evident in the real world, but impossible to capture in economic models. a result of more efficient resource allocation than would be observed in the absence of trade. based on the principle of absolute advantage. ANS: C 48. Trade can make everybody better off because it a. b. c. d. ANS: B increases cooperation among nations. allows people to specialize according to comparative advantage. requires some workers in an economy to be retrained. reduces competition among domestic companies. 49. If labor in Mexico is less productive than labor in the United States in all areas of production, a. b. c. d. then neither nation can benefit from trade. then Mexico can benefit from trade but the United States cannot. then the United States will have a comparative advantage relative to Mexico in the production of all goods. then both Mexico and the United States still can benefit from trade. ANS: D 50. Adam Smith a. b. c. d. and David Ricardo both opposed free trade. opposed free trade, but David Ricardo supported it. supported free trade, but David Ricardo opposed it. and David Ricardo both supported free trade. ANS: D 51. Adam Smith asserted that a person should never attempt to make at home a. b. c. d. what it will cost him more to make than to buy. any good in which that person does not have an absolute advantage. any luxury good. any necessity. ANS: A 52. Which famous economist developed the principle of comparative advantage as we know it today? a. b. c. d. Adam Smith David Ricardo John Maynard Keynes Milton Friedman ANS: B 53. Which of the following is not correct? a. b. c. d. Economists are generally united in their support of free trade. The conclusions of Adam Smith and David Ricardo on the gains from trade have held up well over time. David Ricardo argued that Britain should not restrict imports of grain. Economists’ opposition to trade restrictions is still based largely on the principle of absolute advantage. ANS: D 54. Economists generally support a. b. c. d. ANS: D trade restrictions. government management of trade. export subsidies. free international trade.