Handout 2 - Ch 3

Question 1

If a person chooses self-sufficiency, then she can only consume what she produces.

Answer 1

TRUE

Question 2

If Wrex can produce more math problems per hour and more book reports per hour than Maxine can, then Wrex cannot gain from trading math problems and book reports with Maxine.

Answer 2

FALSE

Question 3

A production possibilities frontier is a graph that shows the combination of outputs that an economy should produce.

Answer 3

FALSE

Question 4

Production possibilities frontiers cannot be used to illustrate tradeoffs.

Answer 4

FALSE

Question 5

Trade allows a country to consume outside its production possibilities frontier.

Answer 5

TRUE

Question 6

Opportunity cost refers to how many inputs a producer requires to produce a good.

Answer 6

FALSE

Question 7

Henry can make a bird house in 3 hours and he can make a bird feeder in 1 hour. The opportunity cost to Henry of making a bird house is 1/3 bird feeder.

Answer 7

FALSE

Question 8

In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Moira’s opportunity cost of knitting scarves is lower than Tori’s opportunity cost of knitting scarves.

Answer 8

FALSE

Question 9

Unless two people who are producing two goods have exactly the same opportunity costs, then one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good.

Answer 9

TRUE

Question 10

It takes Anne 3 hours to make a pie and 4 hours to make a shirt. It takes Mary 2 hours to make a pie and 5 hours to make a shirt. Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade.

Answer 10

TRUE

Question 11

Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a product.

Answer 11

FALSE

Question 12

In a competitive market, the quantity of each good produced and the price at which it is sold are not determined by any single buyer or seller.

Answer 12

TRUE

Question 13

In a perfectly competitive market, the goods offered for sale are all exactly the same.

Answer 13

TRUE

Question 14

In a perfectly competitive market, buyers and sellers are price setters.

Answer 14

FALSE

Question 15

The law of demand is true for most goods in the economy.

Answer 15

TRUE

Question 16

The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good rises, and when the price falls, the quantity demanded falls.

Answer 16

FALSE

Question 17

The demand curve is the upward-sloping line relating price and quantity demanded.

Answer 17

FALSE

Question 18

If something happens to alter the quantity demanded at any given price, then the demand curve shifts.

Answer 18

TRUE

Question 19

A movement upward and to the left along a given demand curve is called a decrease in demand.

Answer 19

FALSE

Question 20

An increase in demand shifts the demand curve to the left.

Answer 20

FALSE

Question 21

A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way.

Answer 21

FALSE

Question 22

If the demand for a good falls when income falls, then the good is called an inferior good.

Answer 22

FALSE

Question 23

When Mario’s income decreases, he buys more pasta. For Mario, pasta is a normal good.

Answer 23

FALSE

Question 24

Baseballs and baseball bats are substitute goods.

Answer 24

FALSE

Question 25

The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular price.

Answer 25

TRUE

Question 26

The law of supply states that, other things equal, when the price of a good rises, the quantity supplied of the good falls.

Answer 26

FALSE

Question 27

An increase in the price of a product and an increase in the number of sellers in the market affect the supply curve in the same general way.

Answer 27

FALSE

Question 28

Whenever a determinant of supply other than price changes, the supply curve shifts.

Answer 28

TRUE

Question 29

A reduction in an input price will cause a change in quantity supplied but not a change in supply.

Answer 29

FALSE

Question 30

At the equilibrium price, quantity demanded is equal to quantity supplied.

Answer 30

TRUE

Question 31

At the equilibrium price, buyers have bought all they want to buy, but sellers have not sold all they want to sell.

Answer 31

FALSE

Question 32

When the market price is above the equilibrium price, the quantity of the good demanded exceeds the quantity supplied.

Answer 32

FALSE

Question 33

Sellers respond to a surplus by cutting their prices.

Answer 33

TRUE

Question 34

Sellers respond to a shortage by cutting their prices.

Answer 34

FALSE

Question 35

An increase in demand will cause an increase in price, which will cause an increase in quantity supplied.

Answer 35

TRUE

Question 36

Explain how absolute advantage and comparative advantage differ.

Answer 36

Absolute advantage reflects a comparison of the productivity of one person, firm, or nation to that of another, while comparative advantage is based on the relative opportunity costs of the persons, firms, or nations. While a person, firm, or nation may have an absolute advantage in producing every good, they cannot have a comparative advantage in the production of every good.

Question 37

Give an example in which one person has an absolute advantage in doing something but another person has a comparative advanatage.

Answer 37

Many examples are possible. Suppose, for example, that Roger can prepare a meal of hot dogs and macaroni in just 10 minutes, while it takes Anita 20 minutes. Also suppose that Roger can do all the laundry in 3 hours, while it takes Anita 4 hours. Roger has an absolute advantage in both cooking and doing the laundry, but Anita has a comparative advantage in doing the laundry. For Anita, the opportunity cost of doing the laundry is 12 meals; for Roger, it is 18 meals.

Question 38

Is absolute advantage or comparative advantage more important for trade?

Answer 38

Comparatives advantage is more important for trade than absolute advantage. In the example in Problem 3, Anita and Roger will complete their chores more quickly if Anita does at least some of the laundry and Roger cooks the meals for both, because Anita has a comparative advantage in doing the laundry, while Roger has a comparative advantage in cooking.

Question 39

Will a nation tend to export or import goods for which it has a comparative advantage?

Answer 39

A nation will export goods for which it has a comparative advantage because it has a smaller oportunity cost of producing those goods. As a result, citizens of all nations are able to consume quantities of goods that are outside their production possibilities frontiers.

Question 40

Why do economists oppose policies that restrict trade among nations?

Answer 40

Economists oppose policies that restrict trade among nations because trade allows all countries to achieve greater prosperity by allowing them to receive the gains fom comparative advantage. Restrictions on trade hurt all countries.

Question 41

Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying. Draw Maria’s production possiblities frontier for reading economics and sociology.

Answer 41

If Maria spends all 5 hours studying economics, she can read 100 pages, so that is the vertical intercept of the production possibilities frontier. If she spends all 5 hours studying sociology, she can read 250 pages, so that is the horizontal intercept. The opportunity costs are constant, so the production possibilities frontier is a straight line.

Question 42

Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying. What is Maria’s opportunity cost of reading 100 pages of sociology?

Answer 42

It takes Maria 2 hours to read 100 pages of sociology. Inthat time, she could read 40 pages of economics. So the opportunity cost of 100 pages of sociology is 40 pages of economics.

Question 43

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. Graph the production possibilities frontier of the American and Japanese economies.

Answer 43

See Figure 3. With 100 million workers and 4 cars per worker, if either economy were devoted completely to cars, it could make 400 million cars. Because a U.S. worker can produce 10 tons of grain, if the United States produced only grain it would produce 1,000 million tons. Because a Japanese worker can produce 5 tons of grain, if Japan produced only grain it would produce 500 million tons. These are the intercepts of the production possibilities frontiers shown in the figure. Note that because the trade-off between cars and grain is constant for both countries, the production possibilities frontiers are straight Lines.

Question 44

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. For the US, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Put this information in a table.

Answer 44

Because a U.S. worker produces either 4 cars or 10 tons of grain, the opportunity cost of one car is 2 1/2 tons of grain, which is 10/4. Because a Japanese worker produces either 4 cars or 5 tons of grain, the opportunity cost of one car is 1 1/4 tons of grain, which is 5/4. Similarly, the U.S. opportunity cost of a ton of grain is 2/5 car (4 divided by 10) and the Japanese opportunity cost of a ton of grain is 4/5 car. This results in the following table:

Question 45

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. Which country has an absolute advantage in producing cars? In producing grains?

Answer 45

Neither country has an absolute advantage in producing cars, because they are equally productive (the same output per worker); the United States has an absolute advantage in producing grain, because it is more productive (greater output per worker).

Question 46

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. Which country has a comparative advantage in producing cars? In producing grain?

Answer 46

Japan has a comparative advantage in producing cars, because it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain, because it has a lower opportunity cost in terms of cars given up.

Question 47

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. Without trade, half of each country’s workers produce cars and half produce gain. What quantities of cars and grain does each country produce?

Answer 47

With half the workers in each country producing each of the goods, the United States would produce 200 million cars (50 million workers times 4 cars each) and 500 million tons of grain (50 million workers times 10 tons each). Japan would produce 200 million cars (50 million workers times 4 cars each) and 250 million tons of grain (50 million workers times 5 tons each).

Question 48

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.Starting from a poition without trade, give an example in which trade makes each country better off.

Answer 48

From any situation with no trade, in which each country is producing some cars and some grain, suppose the United States changed one worker from producing cars to producing grain. That worker would produce 4 fewer cars and 10 additional tons of grain. Then suppose the United States offers to trade 7 tons of grain to Japan for 4 cars. The United States will do this because it values 4 cars at 10 tons of grain, so it will be better off if the trade goes through. Suppose Japan changes one worker from producing grain to producing cars. That worker would produce 4 more cars and 5 fewer tons of grain. Japan will take the trade because it values 4 cars at 5 tons of grain, so it will be better off. With the trade and the change of one worker in both the United States and Japan, each country gets the same amount of cars as before and both get additional tons of grain (3 for the United States and 2 for Japan). Thus, by trading and changing their production, both countries are better off.

Question 49

Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?

Answer 49

Pat’s opportunity cost of making a pizza is 1/2 gallon of root beer, because she could brew 1/2 gallon in the time (2 hours) it takes her to make a pizza. Pat has an absolute advantage in making pizza because she can make one in 2 hours, while it takes Kris 4 hours. Kris’ opportunity cost of making a pizza is 2/3 gallon of root beer, because she could brew 2/3 of a gallon in the time (4 hours) it takes her to make a pizza. Because Pat’s opportunity cost of making pizza is less than Kris’, Pat has a comparative advantage in making pizza.

Question 50

Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?

Answer 50

Because Pat has a comparative advantage in making pizza, she will make pizza and exchange it for root beer that Kris makes.

Question 51

Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price?

Answer 51

The highest price of pizza in terms of root beer that will make both roommates better off is 2/3 of a gallon of root beer. If the price were higher than that, then Kris would prefer making her own pizza (at an opportunity cost of 2/3 of a gallon of root beer) rather than trading for pizza that Pat makes. The lowest price of pizza in terms of root beer that will make both roommates better off is 1/2 gallon of root beer. If the price were lower than that, then Pat would prefer making her own root beer (she can make 1/2 gallon of root beer instead of making a pizza) rather than trading for root beer that Kris makes.

Question 52

Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.

Answer 52

Because a Canadian worker can make either 2 cars a year or 30 bushels of wheat, the opportunity cost of a car is 15 bushels of wheat. Similarly, the opportunity cost of a bushel of wheat is 1/15 of a car. The opportunity costs are the reciprocals of each other.

Question 53

Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the produciton possibilities frontier.

Answer 53

See Figure 4. If all 10 million workers produce 2 cars each, they produce a total of 20 million cars, which is the vertical intercept of the production possibilities frontier. If all 10 million workers produce 30 bushels of wheat each, they produce a total of 300 million bushels, which is the horizontal intercept of the production possibilities frontier. Because the trade-off between cars and wheat is always the same, the production possibilities frontier is a straight line. If Canada chooses to consume 10 million cars, it will need 5 million workers devoted to car production. That leaves 5 million workers to produce wheat, who will produce a total of 150 million bushels (5 million workers times 30 bushels per worker). This is shown as point A on Figure 4.

Question 54

Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. Now suppose that the US offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

Answer 54

If the United States buys 10 million cars from Canada and Canada continues to consume 10 million cars, then Canada will need to produce a total of 20 million cars. So Canada will be producing at the vertical intercept of the production possibilities frontier. However, if Canada gets 20 bushels of wheat per car, it will be able to consume 200 million bushels of wheat, along with the 10 million cars. This is shown as point B in the figure. Canada should accept the deal because it gets the same number of cars and 50 million more bushes of wheat.

Question 55

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?

Answer 55

English workers have an absolute advantage over Scottish workers in producing scones, because English workers produce more scones per hour (50 vs. 40). Scottish workers have an absolute advantage over English workers in producing sweaters, because Scottish workers produce more sweaters per hour (2 vs. 1). Comparative advantage runs the same way. English workers, who have an opportunity cost of 1/50 sweater per scone (1 sweater per hour divided by 50 scones per hour), have a comparative advantage in scone production over Scottish workers, who have an opportunity cost of 1/20 sweater per scone (2 sweaters per hour divided by 40 scones per hour). Scottish workers, who have an opportunity cost of 20 scones per sweater (40 scones per hour divided by 2 sweaters per hour), have a comparative advantage in sweater production over English workers, who have an opportunity cost of 50 scones per sweater (50 scones per hour divided by 1 sweater per hour).

Question 56

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. If England and Scotland decide to trade, which commodity will Scotland trade to England? Explain.

Answer 56

If England and Scotland decide to trade, Scotland will produce sweaters and trade them for scones produced in England. A trade with a price between 20 and 50 scones per sweater will benefit both countries, as they will be getting the traded good at a lower price than their opportunity cost of producing the good in their own countries.

Question 57

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade?

Answer 57

Even if a Scottish worker produced just one sweater per hour, the countries would still gain from trade, because Scotland would still have a comparative advantage in producing sweaters. Its opportunity cost for sweaters would be higher than before (40 scones per sweater, instead of 20 scones per sweater before). But there are still gains from trade because England has a higher opportunity cost (50 scones per sweater).

Question 58

Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a cvhinese worker can produce 100 shirts or 10 computers. Graph the production possibilities curve for the two countries. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graph.

Answer 58

The production possibilities frontiers for the two countries are shown in Figure 5. If, without trade, a U.S. worker spends half of his time producing each good, the United States will have 50 shirts and 10 computers. If, without trade, a worker in China spends half of his time producing each good, China will have 50 shirts and 5 computers.

Question 59

Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a cvhinese worker can produce 100 shirts or 10 computers. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graph. Which country would benefit from trade?

Answer 59

For the United States, the opportunity cost of 1 computer is 5 shirts, while the opportunity cost of a shirt is 1/5 computer. For China, the opportunity cost of 1 computer is 10 shirts, while the opportunity cost of 1 shirt is 1/10 computer. Therefore, the United States has a comparative advantage in the production of computers and China has a comparative advantage in the production of shirts. China would export shirts. The price of a shirt will fall between 1/5 and 1/10 of a computer. An example would be a price of 1/8 computer. In other words, China could export 8 shirts and receive 1 computer in return. Both countries would benefit from trade. China would specialize in shirts (producing 100) and export 8. This would leave them with 92 shirts. In return, they would get 1 computer. The combination of 92 shirts and 1 computer was not available to China before trade. The United States could specialize in computers (producing 20) and export 1 computer to China in exchange for 8 shirts. The United States would end up with 19 computers and 8 shirts, a combination that was impossible without trade.

Question 60

Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a cvhinese worker can produce 100 shirts or 10 computers. Explain at what price of computers (in terms of shirts) the two countries might trade.

Answer 60

The price of a computer would fall between 5 and 10 shirts. If the price was below 5, the United States would not be willing to export computers because the opportunity cost of a shirt for the United States is 1/5 computer. If the price was greater than 10 shirts, China would not be willing to import computers because (for China) the opportunity cost of a computer is 10 shirts.

Question 61

Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a cvhinese worker can produce 100 shirts or 10 computers. Suppose that China catches up with American productivity so that a Chinese worker can produce 100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance in Chinese productivity affect the economic well-being of citizens of the two countries?

Answer 61

Once the productivity is the same in the two countries, the benefits of trade disappear. Trade is beneficial because it allows countries to exploit their comparative advantage. If China and the United States have exactly the same opportunity cost of producing shirts and computers, there will be no more gains from trade available.

Question 62

An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes. Who has the absolute advantage in coffee?

Answer 62

An average worker in Brazil has an absolute advantage in the production of coffee because he requires less time than an average worker in Peru.

Question 63

An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes. Who has the comparative adbantage in coffee?

Answer 63

An average worker in Peru has a comparative advantage in the production of coffee. The opportunity cost of each ounce of coffee for the average worker in Peru (1.5 ounces of soybeans) is lower than the opportunity cost of each ounce of coffee for the average worker in Brazil (3 ounces of soybeans).

Question 64

An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes. If the two countries specialize and trade with each other, who will import coffee?

Answer 64

Brazil will import coffee from Peru because Peru has a comparative advantage in the production of coffee.

Question 65

An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes. Assume that the two countries trade and that the country importing coffee trades 2 ounces of soybeans for 1 ounce of coffee. Explain why both countries will benefit from this trade.

Answer 65

The price of 2 ounces of soybeans for every ounce of coffee falls between the two opportunity costs.

Question 66

Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.

Answer 66

TRUE

Question 67

Certain very talented people have a comparative adbantage in eveything they do.

Answer 67

FALSE

Question 68

If a certain trade is good for one person, it can’t be good for the other one.

Answer 68

FALSE

Question 69

If a certain trade is good for one person, it is always good for other one.

Answer 69

FALSE

Question 70

If trade is good for a country, it must be good for everyone in the country.

Answer 70

FALSE

Question 71

The US exports corn and aircraft to the rest of the world, and it imports oil and clothing from the rest of the world. Do you think this pattern of trade is consistent with the principle of comparative advantage? Why or why not?

Answer 71

This pattern of trade is consistent with the principle of comparative advantage. If the United States exports corn and aircraft, it must have a comparative advantage in the production of these goods. Because it imports oil and clothing, the United States must have a comparative disadvantage in the production of these items.