Short-Answer Questions Flashcards
CHT3 Why do people choose to become interdependent as opposed to self-sufficient?
Because a consumer gets a greater variety of goods at a much lower cost than they could produce by themselves. That is, there are gains from trade.
CHT3 Why is comparative advantage important in determining trade instead of absolute advantage?
What is important in trade is how a country’s costs
without trade differ from each other. This is determined by the relative opportunity costs across countries.
CHT3 What are the gains from trade?
The additional output that comes from countries with different opportunity costs of production specializing in the production of the item for which they have the lower domestic opportunity cost.
CHT3 Why is a restriction of trade likely to reduce material welfare?
Because it forces people to produce at a cost than they pay when they trade.
CHT3 Suppose a lawyer that earns $200 per hour can also type 200 words per minute. Should the lawyer hire a secretary who can only type 50 words per minute? Why?
Yes, as long as the secretary earns less than $50 per
hour, the lawyer is ahead.
CHT3 Evaluate this statement:A technologically advanced country, which is better than its neighbor at producing everything, would be better off ifit closed its borders to trade because the less productive country is a burden to the advanced country.
This is not true.All countries can gain from trade if their opportunity costs of production differ. Even the least productive country will have a comparative advantage at producing something, and it can trade this good to the advanced country for less than the advanced country’s opportunity cost.
CHT4 What are the two main characteristics of a perfectly competitive market?
i) The goods offered for sale are all the same
ii) The buyers and sellers are so numerous that no one
buyer or seller can influence the price.
CHT4 Explain the law of demand.
Other things equal, price and quantity demanded of a good are negatively related.
CHT4 What are the variables that should affect the amount of a good that consumers wish to buy; other than its price?
Income, prices of related goods, tastes, expectations and number of buyers in the market.
CHT4 What is the difference between a normal good and an inferior good?
When income demand for a normal good increases
or shifts right. When income rises, demand for an inferior good decreases or shifts left
CHT4 Explain the law of supply
Other things equal, price and quantity supplied of a
good are positively related.
CHT4 What are the variables that: should affect the amount of a good that producers wish to sell, other than its price?
The variables are input prices, technology, expectations, and number of sellers in the market.
CHT4 Suppose suppliers of corn expect the price of corn to rise in the future. How would this affect the supply and demand for corn and the equilibrium price and quantity of corn?
The supply of corn in today’s market would decrease (shift left) as sellers hold back their offerings in anticipation of greater profits if the price rises in the future. If only suppliers expect higher prices, demand would be unaffected. The equilibrium price would rise and the equilibrium quantity would fall.
CHT4 If there is a surplus of a good, is the price above or below the equilibrium price for that good?
The price must be above the equilibrium price.
CHT4 Suppose there is an increase in consumers’ incomes. In the market for automobiles (a normal good), does this event cause an increase in demand or an increase in quantity demanded? Does this cause an increase in supply or an increase in quantity supplied? Explain.
There would be an increase in the demand for automobiles, which means that the entire demand curve shifts to the right. This implies a movement along the fixed supply curve as the price rises. The increase in price causes an increase in the quantity supplied of automobiles, but there is no increase in the supply of automobiles.
