Chapter 02 The Econ Problem Answers Part 3

CH 02 - The Econ Problem 89) A movement along the production possibilities frontier will result from A) change in the stock of capital. B) change in the labour force. C) technological change. D) all of the above. E) none of the above. 90) The opportunity cost of pushing the production possibilities frontier outward is A) reduced current consumption. B) technological change. C) capital accumulation. D) the gain in future consumption. E) all of the above. 91) In general, the higher the proportion of resources devoted to technological research in an economy, the A) faster the production possibilities frontier will shift inward. B) more bowed out will be the shape of the production possibilities frontier. C) greater will be current consumption. D) faster the production possibilities frontier will shift outward. E) closer it will come to having a comparative advantage in the production of all goods. 92) Consider a country that has two industries. In the north, they grow wild rice, which requires a lot of rainfall. In the south, they grow wheat, which requires just a moderate amount of rainfall (too much rainfall is bad for wheat production). One year, there is a record rainfall. This will result in A) a parallel shift inward of the production possibilities frontier. B) the production possibilities frontier swiveling, with the wild rice intercept decreasing, and the wheat intercept increasing. C) the production possibilities frontier swiveling, with the wild rice intercept increasing, and the wheat intercept decreasing. D) a parallel shift outward of the production possibilities frontier. E) none of the above. 93) Suppose a hurricane causes extensive devastation, destroying houses, roads, schools and factories. What would be the effect of this hurricane on a production possibilities frontier consisting of consumption goods and capital goods? A) It would shift inward at all points. B) There would be a movement along the existing production possibilities frontier towards a less capital- intensive point. C) There would be a movement from the existing production possibilities frontier inwards towards a point with unused or misallocated resources. D) It would shift outward at all points. E) There would be a movement along the existing production possibilities frontier towards a more capital- intensive point. 94) The depletion of fish stocks in Eastern Canada, with its accompanying unemployment, will lead to a A) shift inward of the existing production possibilities frontier. B) movement from the existing production possibilities frontier to a point inside the production possibilities frontier. C) shift outward of the existing production possibilities frontier. D) shift inward of the existing production possibilities frontier plus a movement to a point inside the new production possibilities frontier. E) movement along the existing production possibilities frontier to a point of less fish production. 19 CH 02 - The Econ Problem 95) Which of the following quotations illustrates economic growth? A) "The firm should lower the price it charges for widgets and gadgets." B) "The more and more gadgets the firm produces, the bigger the fall in widget production." C) "If the firm invests more in capital equipment, it can expand production next year." D) "The firm should sell more gadgets, even if it means less widget sales." E) "The firm has been able to lower costs due to its extensive experience in building widgets." 96) Economic growth ________ overcome scarcity because ________. A) does not; economic growth requires capital accumulation and technological change B) does; we will eventually reach the point where we have too much C) does; with economic growth the PPF rotates outward and eventually becomes a horizontal line D) does not; we can produce more goods and services but it is still impossible to satisfy all our wants E) does; with economic growth the PPF rotates outward and eventually becomes a vertical line 97) In 1968, the production possibilities per person in Canada were ________ than those in Hong Kong. Canada devoted ________ of its resources to accumulating capital and the remainder to consumption. Hong Kong devoted ________ of its resources to accumulating capital and the remainder to consumption. Because Hong Kong devoted a ________ fraction of its resources to accumulating capital, its production possibilities have ________. A) smaller; one-fifth; one-third; greater; expanded more quickly B) greater; one- half; one-quarter; smaller; not expanded as quickly C) greater; one- third; one-fifth; smaller; not expanded as quickly D) greater; one- fifth; one- third; greater; expanded more quickly E) smaller; one-third; one -fifth; smaller; not expanded as quickly 98) Individuals A and B can both produce good X. We say that A has a comparative advantage in the production of good X if A) A has a higher opportunity cost of producing X than B. B) A can produce more units of X in a given time period than B. C) A can produce X using newer technology than B. D) A has a lower opportunity cost of producing X than B. E) A can produce less units of X in a given time period than B. 99) Individuals A and B can both produce goods X and Y. Individual A has a comparative advantage in the production of X if A) the amount by which A must reduce production of Y is more than the amount by which B must reduce production of Y to produce an additional unit of X. B) A is faster than B at producing X. C) B has superior knowledge about how to produce X. D) the amount by which A must reduce production of Y is less than the amount by which B must reduce production of Y to produce an additional unit of X. E) A has a preference to consume X. 100) Debra has an absolute advantage in producing a good when she A) has exclusive rights to sell that good. B) can produce the good at lower opportunity cost than anyone else. C) has better technology than anyone else. D) has a comparative advantage in producing that good. E) can produce more of that good than anyone else, using the same quantity of inputs. 101) A person who has an absolute advantage in the production of all goods will A) also have a comparative advantage in the production of all goods. B) produce all goods at the lowest opportunity cost. C) not be able to gain from specialization and trade. D) not have a comparative advantage in the production of any goods. E) have a comparative advantage in the production of only some goods and not others. 20 CH 02 - The Econ Problem Use the information below to answer the following questions. Fact 2.4.1 In an eight-hour day, Andy can produce either 24 loaves of bread or 8 kilograms of butter. In an eight-hour day, Rolfe can produce either 8 loaves of bread or 8 kilograms of butter. 102) Given Fact 2.4.1, the opportunity cost of producing 1 loaf of bread is A) 1/3 kilogram of butter for Andy and 1 kilogram of butter for Rolfe. B) 3 kilograms of butter for Andy and 1 kilogram of butter for Rolfe. C) 8 kilograms of butter for both Andy and Rolfe. D) 20 minutes (1/3 hour) for Andy and 1 hour for Rolfe. E) not calculable from the given information. 103) From Fact 2.4.1, we know that A) Andy has the lower opportunity cost of producing bread, while Rolfe has the lower opportunity cost of producing butter. B) Andy has the higher opportunity cost of producing both bread and butter. C) Andy has the lower opportunity cost of producing butter, while Rolfe has the lower opportunity cost of producing bread. D) Andy has the lower opportunity cost of producing both bread and butter. E) Andy has the lower opportunity cost of producing bread, while Andy and Rolfe have equal opportunity costs of producing butter. 104) Refer to Fact 2.4.1. Which one of the following statements is true? A) Andy has an absolute advantage in butter production. B) Andy has a comparative advantage in bread production. C) Andy has a comparative advantage in butter production. D) Rolfe has an absolute advantage in butter production. E) Rolfe has a comparative advantage in bread production. 105) Refer to Fact 2.4.1. The opportunity cost of producing 1 kilogram of butter is A) 8 loaves of bread for Rolfe and 24 loaves of bread for Andy. B) 1 hour for Andy and 1 hour for Rolfe. C) 3 loaves of bread for Andy and 1 loaf of bread for Rolfe. D) 20 minutes (1/3 hour) for Andy and 1 hour for Rolfe. E) 3 loaves of bread for Andy and 1/3 loaf of bread for Rolfe. 106) Given Fact 2.4.1, Andy and Rolfe A) can gain from trade if Andy specializes in butter production and Rolfe specializes in bread production. B) can trade, but only Andy will gain. C) can trade, but only Rolfe will gain. D) cannot gain from trade. E) can gain from trade if Andy specializes in bread production and Rolfe specializes in butter production. 107) Consider Fact 2.4.1. After specialization, total consumption will A) depend on the preferences of Andy and Rolfe. B) be 32 loaves of bread and 16 kilograms of butter. C) be 8 loaves of bread and 24 kilograms of butter. D) be 24 loaves of bread and 8 kilograms of butter. E) be 8 loaves of bread and 8 kilograms of butter. 21 CH 02 - The Econ Problem Use the information below to answer the following questions. Fact 2.4.2 Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. 108) Refer to Fact 2.4.2. Which one of the following statements is true? A) Agnes has a comparative advantage in the production of Y . B) Brenda will not gain from trade. C) Brenda has a comparative advantage in the production of X. D) Brenda has an absolute advantage over Agnes in the production of both goods. E) Agnes will not gain from trade. 109) Given Fact 2.4.2, the opportunity cost of producing a unit of X is A) 1 unit of Y for Agnes and 2 units of Y for Brenda. B) 1 hour for Agnes and 1/2 hour for Brenda. C) 1 unit of Y for Agnes and 1/2 unit of Y for Brenda. D) 1 hour for Agnes and 1/4 hour for Brenda. E) 1 hour for Agnes and 2 hours for Brenda. 110) Given Fact 2.4.2, the opportunity cost of producing a unit of Y is A) 1 unit of X for Agnes and 1/2 unit of X for Brenda. B) 1 unit of Y for Agnes and 2 units of Y for Brenda. C) 1 hour for Agnes and 1/2 hour for Brenda. D) 1 unit of Y for Agnes and 1/2 unit of Y for Brenda. E) 1 hour for Agnes and 2 hours for Brenda. 111) Complete the following sentence. Given Fact 2.4.2, A) there will be gains from trade if Agnes specializes in the production of X and Brenda in Y. B) there will be no gains from trade because Agnes has an absolute advantage. C) there will be gains from trade only if Agnes specializes in the production of Y and Brenda in X. D) there will be gains from trade only if Agnes becomes faster at producing X . E) there will be gains from trade, no matter what Brenda and Agnes specialize in, as long as they specialize. 112) Given Fact 2.4.2, what would be the total output of X and Y in an eight-hour day if Agnes and Brenda each specialized in producing the good in which they have a comparative advantage? A) 8 units of X and 32 units of Y B) 24 units of X and 40 units of Y C) 8 units of X and 16 units of Y D) 16 units of X and 8 units of Y E) 3 units of X and 5 units of Y 113) Any two individuals will gain from exchange A) unless one has an absolute advantage in producing all goods. B) if each specializes in the production of the good for which he has the higher opportunity cost. C) unless they have different opportunity costs for producing all goods. D) unless they have the same absolute advantage in producing all goods. E) unless they have the same opportunity costs for producing all goods. 22 CH 02 - The Econ Problem Use the figure below to answer the following questions. Table 2.4.1 The planets of Vulcan and Romulus each produce goods X and Y. The following table gives points on their production possibilities frontiers. Vulcan Good X Good Y 0 16 2 12 4 8 6 4 8 0 Romulus Good X 0 2 4 6 8 Good Y 12 9 6 3 0 114) Refer to Table 2.4.1. Which one of the following is true? A) Romulus has both an absolute advantage and a comparative advantage in the production of X. B) Vulcan has a comparative advantage in the production of X. C) Romulus has both an absolute advantage and a comparative advantage in the production of Y. D) Romulus has a comparative advantage in the production of X. E) Vulcan should specialize in the production of X. 115) Refer to Table 2.4.1. Which one of the following is true? A) The opportunity cost of producing more of good X is lower in Vulcan. B) Vulcans are smarter than Romulans. C) The opportunity cost of producing more of good Y is the same for both planets. D) The opportunity cost of producing more of good Y is lower in Vulcan. E) The opportunity cost of producing more of good X is the same for both planets. 116) Refer to Table 2.4.1. For Vulcan, the opportunity cost of producing an additional unit of X is A) 2 units of Y . B) 2/3 units of Y. C) 4 units of Y . D) 1 unit of Y. E) dependent upon how many units of X are already produced. 117) Refer to Table 2.4.1. For Romulus, the opportunity cost of producing an additional unit of X is A) 1 unit of Y. B) 2 units of Y . C) 4 units of Y . D) 2/3 units of Y . E) 3/2 units of Y. 118) Refer to Table 2.4.1. For Romulus, the opportunity cost of producing an additional unit of Y is A) 2 units of X . B) 3/2 units of Y. C) 1/2 unit of X. D) 3 units of X. E) 2/3 units of X. 119) Refer to Table 2.4.1. For Vulcan, the opportunity cost of producing an additional unit of Y is A) 3 units of X. B) 2 units of X . C) 2/3 units of X. D) 1/2 units of X. E) 4 units of X. 23 CH 02 - The Econ Problem 120) Refer to Table 2.4.1. Each country will gain from trade if A) Romulus specializes in both goods. B) they both continue to produce both goods. C) Romulus specializes in good X and Vulcan specializes in good Y . D) Vulcan specializes in good X and Romulus specializes in good Y . E) Vulcan specializes in both goods. 121) If individuals A and B can both produce only goods X and Y and A does not have a comparative advantage in the production of either X or Y, then we know A) A and B have the same opportunity costs for X and for Y. B) B has an absolute advantage in the production of X and Y. C) B has a comparative advantage in the production of both X and Y . D) A must have lower opportunity costs of production for both goods. E) the gains from trade will be large but only in one direction. 122) Consider the following household. In 5 hours, Bob can cook 5 meals or clean 6 rooms. In 5 hours, Mary can cook 30 meals or clean 10 rooms. Select the best statement. A) Bob has an absolute advantage in the production of both goods. B) Since Mary is better at producing both goods, she should produce both. C) Mary should specialize in cooking. D) Bob has a comparative advantage in cooking. E) none of the above Use the table below to answer the following questions. Table 2.4.2 Production for one week by Sheila and Bruce Sheila Good X Good Y 8 0 6 1 4 2 2 3 0 4 Bruce Good X 20 15 10 5 0 Good Y 0 2 4 6 8 123) Given the information in Table 2.4.2, can Sheila and Bruce gain by specialization? A) Only if they are married to each other. B) Yes, if each specializes in the good in which he has a comparative advantage. C) No, not under the given circumstances. D) It depends on the wages each earns . E) Yes, but only if Bruce gets paid more than Sheila. 124) Given the information in Table 2.4.2, which one of the following is true? A) Sheila should specialize in good X. B) Bruce should specialize in good X. C) The opportunity cost to Bruce of an additional unit of X is 0.4 units of Y. D) A and B. E) B and C. 24 CH 02 - The Econ Problem 125) Suppose John and Joe each have different production possibility frontiers; John specializes in cloth and Joe specializes in corn. John's island unexpectedly has exceptionally good weather, and suddenly he is twice as productive in the production of both corn and cloth. Select the best statement. A) There will be a change in what John and Joe specialize in, because John's opportunity cost of production will have risen. B) This is an example of unemployed resources becoming employed. C) As a result, it is possible that John and Joe will switch what they specialize in. D) There will be no change in what John and Joe specialize in, because John's comparative advantage has not changed. E) As a result, John will have an absolute advantage in both corn and cloth. 126) It pays for people to specialize and trade with each other because A) they can take advantage of the fact they have an absolute advantage in the production of something. B) otherwise they would not survive. C) otherwise they cannot take advantage of the fact they have a high opportunity cost of producing something. D) this way they can consume outside their production possibilities frontier. E) this way the strong can exploit the weak. 127) There are two goods, X and Y. If the opportunity cost of producing good X is lower for Pam than for Gino, then A) Gino has an absolute advantage in the production of Y. B) Pam has an absolute advantage in the production of X. C) Pam has a comparative advantage in the production of X. D) Gino has a comparative advantage in the production of Y. E) C and D. 128) Mexico and Canada produce both oil and apples using labour only. A barrel of oil is produced with 4 hours of labour in Mexico and 8 hours of labour in Canada. A bushel of apples is produced with 8 hours of labour in Mexico and 12 hours of labour in Canada. Canada has A) a comparative advantage in apple production. B) a comparative advantage in oil production. C) an absolute advantage in apple production. D) an absolute advantage in oil production. E) none of the above. 129) In Portugal, the opportunity cost of a bale of wool is 3 bottles of wine. In England, the opportunity cost of 1 bottle of wine is 3 bales of wool. Given this information, A) England has an absolute advantage in wool production. B) England has an absolute advantage in wine production. C) Portugal has a comparative advantage in wool production. D) Portugal has a comparative advantage in wine production. E) no trade will occur. 130) Consider a world with two industries, lifeguarding and cleaning toilets. Data is exceptional at cleaning toilets because he has no sense of smell. On the other hand, he is very pale and sunburns easily, and therefore, is not suitable for lifeguard duties. Worf has an exceptionally keen sense of smell, trained during his years as a gourmet chef, that makes working as a toilet-cleaner difficult. On the other hand, he is dark, and the sun doesn't burn himhe is an exceptional lifeguard. In this case, we can say all of the following except A) Data should specialize in toilet- cleaning. B) Data has a comparative advantage at toilet -cleaning. C) Worf has an absolute advantage in lifeguarding. D) Worf has a comparative advantage at lifeguarding. E) Worf should specialize in lifeguarding. 25 CH 02 - The Econ Problem 131) W hich of the following quotations illustrates dynamic comparative advantage? A) "If the firm invests more in capital equipment, it can expand sales next year." B) "If the firm reorganized its production process, it could produce more widgets and more gadgets." C) "The firm has been able to lower costs due to its extensive experience in building widgets." D) "The firm should sell more gadgets, even if it means less widget sales." E) "The more and more gadgets the firm produces, the bigger the fall in widget production." 132) Learning-by- doing is the basis of A) dynamic comparative advantage. B) financial property right. C) intellectual property rights. D) absolute comparative advantage. E) none of the above. 133) To gain from comparative advantage, countries must not only trade, they must also A) invest. B) specialize. C) save. D) engage in capital accumulation. E) engage in research and development. 134) In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps or 7 jackets. Sue's opportunity cost of producing a cap is ________ jackets and Tessa's opportunity cost of producing a cap is ________ jackets. ________ has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 7 caps, ________. A) 0.2; 0.10; Sue; both Sue and Tessa gain B) 0.2; 0.10; Sue; Tessa gains but Sue loses C) 0.2; 0.10; Tessa; both Sue and Tessa gain D) 5.0; 10.0; Tessa; Sue loses but Tessa gains E) 5.0; 10.0; Sue; both Sue and Tessa gain 135) Trade is organized using the social institutions of A) markets. B) firms. C) property rights. D) money. E) all of the above. 136) Markets I. enable buyers and sellers to get information II. are defined by economists as geographical locations where trade occurs. III. coordinate buying and selling decisions through price adjustments Which of the above statements are correct? A) III only B) II and III only C) I, II and III D) I only E) I and III only 26 CH 02 - The Econ Problem 137) A property right is A) a social arrangement that governs the ownership, use, and disposable of anything that people value. B) any arrangement that enables buyers and sellers to get information and to do business with each other. C) a medium of exchange. D) an economic unit that hires factors of production and organizes those factors to produce and sell goods and services. E) any commodity or token that is generally acceptable as a means of payment. 138) The flows in the market economy that go from firms to households are ________. The flows in the market economy that go from households to firms are ________. A) all flowing through factor markets; all flowing through goods markets B) the real flows of goods and services and the income flows of wages, rent, interest and profits; the real flows of labour, land, capital and entrepreneurship and the flow of expenditure on goods and services C) the income flows of wages, rent, interest, and profits and the flow of expenditure on goods and services; the real flows of goods and services and the real flows of labour, land, capital and entrepreneurship D) the real flows of goods and services and the real flows of labour, land, capital and entrepreneurship; the income flows of wages, rent, interest, and profits and the flow of expenditure on goods and services E) all flowing through goods markets; all flowing through factor markets 139) The main functions of markets include A) enabling buyers and sellers to get information about each other. B) selling goods but not factors of production. C) promoting the social interest, but not the self- interest. D) promoting the self- interest but not the social interest. E) establishing a physical location for business transactions. 27