Module 2 - Practice questions Flashcards
What is the opportunity cost for the USA of producing MANUFACTURES?
a) 4 units of MANUFACTURING
b) 20 units of AGRICULTURE
c) 5 units of AGRICULTURE
d) 1/5 units of MANUFACTURING
5 units of AGRICULTURE
If the USA shifts 1 unit of labour into MANU and out of AG, then MANU rises by 4 and AG falls by 20.
Hence, for each unit of MANU, we give up 5 (= 20/4) units of AG.
What is the opportunity costs for Canada of producing MANUFACTURES?
a) 1/8 units of MANUFACTURING
b) 2 units of MANUFACTURING
c) 8 units of AGRICULTURE
d) 16 units of AGRICULTURE
8 units of AGRICULTURE
If the Canada shifts 1 unit of labour into MANU and out of AG, then MANU rises by 2 and AG falls by 16.
Hence, for each unit of MANU, we give up 8 (= 16/2) units of AG
Notice that Canada has the higher opportunity cost so will import MANU from the USA
What is the opportunity costs for the USA of producing AGRICULTURE?
a) 1/5 units of MANUFACTURING
b) 5 units of AGRICULTURE
c) 4 units of MANUFACTURING
d) 20 units of AGRICULTURE
1/5 units of MANUFACTURING
If the USA shifts 1 unit of labour into AG and out of MANU, then AG rises by 20 and MANU falls by 4.
Hence, for each unit of MANU, we give up 1/5 (= 4/20) units of MANU.
Canada has an op cost of 1/8 so Canada has the CA in AG.
The USA has a/an ________________in MANUFACTURES?
a) Absolute advantage
b) Absolute dis-advantage
c) Competitive advantage
d) Comparative dis-advantage
Absolute advantage
Productivity in MANU in the USA is 4 and only 2 in Canada. Hence it has an absolute
advantage in MANU relative to Canada. Since it has an opportunity costs of 5, while Canada has an opportunity cost of 8, it also has a comparative advantage in MANU.
Canada has a/an ________________in MANUFACTURES?
a) Absolute advantage
b) Absolute dis-advantage
c) Competitive advantage
d) Comparative advantage
Absolute disadvantage
Canada has an absolute disadvantage in both MANU and AG since productivities are lower in both relative to the USA. It has a comparative disadvantage in MANU since it has higher opportunity costs than the USA in MANU (8 versus 5).
If Canada puts half of their labour force into MANU and half into AG, then it produces ______?
a) Exactly 1/10 as much as the USA does in each sector
b) 200 units of manufactures and 1600 units of agriculture
c) The maximum it can
d) Inside its Production Possibility Frontier (PPF).
200 units of manufactures and 1600 units of agriculture
This relates to the production possibility frontier (PPF). If we have 100 units in MANU then we have 100* 2 = 200 units MANU and 100 units of labour into AG produces 100*16 = 1600 units AG.
This would be on the PPF. We cannot compare to the USA since we do not know their labour allocations. Maximum?: if we put all labour into AG then maximum would be 3200 units of AG.
If the USA puts all of their labour force into MANU and none into AG, then it produces ______?
a) Too little AG to be self-sufficient
b) Inside its Production Possibility Frontier (PPF).
c) 4,000 units of MANUFACTURING
d) Too much MANUFACTURING for its own good.
4,000 units of MANUFACTURING
MANU output is 1000*4 = 4000 and AG is zero. This would be on the PPF though at one of the ‘corners’. “Too little AG” and “Too much MANU” requires additional information to evaluate and we
do not have the information.
The point here is that we have to look at what we know in the problem presented. Though we may want to conclude something about what is optimal,
we cannot conclude anything of the sort given the information we have.
If Canada shifts 10 units of labour from AG to MANU, what is the impact on output assuming we are on the PPF?
a) MANU output is unchanged since the labour is only useful in AG
b) MANU output rises by 20 and AG output falls by 160 units
c) MANU output rises by 20 and AG output stays the same
d) MANU output cannot rise without more labour in the country
MANU output rises by 20 and AG output falls by 160 units
MANU rises by 20 ( = 2 * 10) but the important part is that AG falls by 160 (= 16 * -10). Labour is assumed to be useful in both activities so (a) is not correct. (c) is incorrect since we are on the PPF and so must give up AG to achieve more MANU. (d) is incorrect as long as we accept less AG as a result.
Based on the notion of Comparative Advantage, ________
a) The USA should produce and export AGRICULTURE
b) The USA will produce and export both MANUFACTURES and AGRICULTURE
c) Cannot benefit by trade with Canada.
d) The USA should produce and export MANUFACTURES
The USA should produce and export MANUFACTURES
The USA as a comparative advantage in MANU (lower op cost 5 vs 8) so will specialize in it. It will export MANU to Canada. It cannot export both products since that would mean Canada imports both. We use our exports of AG to finance the import of MANU.
Canada is relatively more productive in __________.
a) Agriculture
b) Manufacturing
c) Neither AGRICULTURE or MANUFACTURING
d) Both AGRICULTURE or MANUFACTURING since it has higher productivity in both sectors
Agriculture
This is just another way of saying that Canada has the comparative advantage in AG. Canada has the lower opportunity costs (1/8 versus 1/5). Alternately, the US is twice as good in MANU but only 25% better in AG. Hence the USA is relative more productive in MANU. That then implies Canada is relatively more productive in AG.
Probably better to say that cnada is ½ as good as the USA in MANU but is ¾ as good in AG. Hence, in terms of relative productivity, it better at AG.
What is the minimum exchange Canada will accept to export AG to the USA in return for MANU?
a) 1 unit of AG in exchange for 8 units of MANU
b) 1 unit of AG in exchange for 2 units of MANU
c) 1 unit of AG in exchange for 1/8 units of MANU
d) 1 unit of AG in exchange for 16 units of MANU
1 unit of AG in exchange for 1/8 units of MANU
Canada can produce AG at a cost of 1/8 unit of MANU. If the US offers less than this,
then Canada is better off simply producing its own MANU. Alternately, for every unit on MANU we import, we would be willing to offer, at most, 8 units of AG. Ideally, we would offer less, say 6 units of AG. That way we get 1 unit MANU for a cost of only 6 AG. This is less expensive than producing MANU ourselves.
What is the minimum exchange the US will accept to export MANU to Canada in return for AG?
a) 1 unit of MANU in exchange for 8 units of AG
b) 1 unit of MANU in exchange for 5 units of AG
c) 1 unit of MANU in exchange for 1/5 units of AG
d) 1 unit of MANU in exchange for 1/8 units of AG
1 unit of MANU in exchange for 1/5 units of AG
USA can produce MANU at a cost of 5 unit of AG. If Canada offers less than this, then
the US is better off simply producing its own AG. Alternately, for every unit on MANU they export, they would be willing to accept, no less than 5 units of AG. Ideally, they would like more, say 6 units of AG. That way they give up 1 unit MANU and get 6 units of AG. This is better than producing AG themselves.
