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Chapter 3



True/False
Indicate whether the statement is true or false.
 

 1. 

If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.
 

 2. 

Comparative advantage, not absolute advantage, determines the decision to specialize in production.
 

 3. 

Absolute advantage is a comparison based on productivity.
 

 4. 

Self-sufficiency is the best way to increase one's material welfare.
 

 5. 

Comparative advantage is a comparison based on opportunity cost.
 

 6. 

If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.
 

 7. 

If a country's workers can produce 5 hamburgers per hour or 10 bags of French fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers.
 

 8. 

If producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers.
 

 9. 

If trade benefits one country, its trading partner must be worse off due to trade.
 

 10. 

Talented people that are the best at everything have a comparative advantage in the production of everything.
 

 11. 

The gains from trade can be measured by the increase in total production that comes from specialization.
 

 12. 

When a country removes a specific import restriction, it always benefits every worker in that country.
 

 13. 

If Germany's productivity doubles for everything it produces, this will not alter its prior pattern of specialization because it has not altered its comparative advantage.
 

 14. 

If an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminates trade with less developed countries and becomes completely self-sufficient.
 

 15. 

If gains from trade are based solely on comparative advantage, and if all countries have the same opportunity costs of production, then there are no gains from trade.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 16. 

If a nation has an absolute advantage in the production of a good it:
a.
can benefit by restricting imports of that good.
b.
will specialize in the production of that good and export it.
c.
can produce that good using fewer resources than its trading partner.
d.
can produce that good at a lower opportunity cost than its trading partner.
 

 17. 

If a nation has a comparative advantage in the production of a good it,
a.
can produce that good at a lower opportunity cost than its trading partner.
b.
can benefit by restricting imports of that good.
c.
can produce that good using fewer resources than its trading partner.
d.
must be the only country with the ability to produce that good.
 

 18. 

Which of the following statements about trade is true?
a.
Unrestricted international trade benefits every person in a country equally.
b.
Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.
c.
People that are skilled at all activities cannot benefit from trade because they do not have an opportunity cost in production.
d.
Trade can benefit everyone in society because it allows people to specialize in activities in which they have an absolute advantage.
 

 19. 

According to the principle of comparative advantage, countries
a.
should specialize in the production of goods that they enjoy consuming.
b.
with a comparative advantage in the production of every good need not specialize.
c.
should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.
d.
should specialize in the production of goods for which they use fewer resources in production than their trading partners.
 

 20. 

Which of the following statements is true?
a.
A self-sufficient country can, at best, consume on its production possibilities frontier.
b.
Only countries with an absolute advantage in the production of every good should strive to be self-sufficient.
c.
A self-sufficient country consumes outside its production possibilities frontier.
d.
Self-sufficiency is the road to prosperity for most countries.
 

 21. 

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, the domestic price of 1 ring is
a.
1/4 of a watch.
b.
3 watches.
c.
1/3 of a watch.
d.
12 watches.
e.
4 watches.
 

 22. 

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, the opportunity cost of 1 watch is
a.
1/4 of a ring.
b.
3 rings.
c.
4 rings.
d.
12 rings.
e.
1/3 of a ring.
 

 23. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

Which of the following statements about absolute advantage is true?
a.
Australia has an absolute advantage in the production of food while Korea has an absolute advantage in the production of electronics.
b.
Korea has an absolute advantage in the production of food while Australia has an absolute advantage in the production of electronics.
c.
Australia has an absolute advantage in the production of both food and electronics.
d.
Korea has an absolute advantage in the production of both food and electronics.
 

 24. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

The opportunity cost of 1 unit of electronics in Australia is
a.
4 units of food.
c.
1/5 of a unit of food.
b.
5 units of food.
d.
1/4 of a unit of food.
 

 25. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

The opportunity cost of 1 unit of electronics in Korea is
a.
4 units of food.
c.
2 units of food.
b.
1/4 units of food.
d.
1/2 of a unit of food.
 

 26. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

The opportunity cost of 1 unit of food in Australia is
a.
1/5 of a unit of electronics.
c.
4 units of electronics.
b.
5 units of electronics.
d.
1/4 of a unit of electronics.
 

 27. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

            The opportunity cost of 1 unit of food in Korea is
a.
1/2 of a unit of electronics.
c.
2 units of electronics.
b.
1/4 units of electronics.
d.
4 units of electronics.
 

 28. 

Refer to Figure 3-1.

            Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

Which of the following statements about comparative advantage is true?
a.
Australia has a comparative advantage in the production of both food and electronics.
b.
Korea has a comparative advantage in the production of both food and electronics.
c.
Australia has a comparative advantage in the production of food while Korea has a comparative advantage in the production of electronics.
d.
Korea has a comparative advantage in the production of food while Australia has a comparative advantage in the production of electronics.
e.
Neither country has a comparative advantage.
 

 29. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

            Korea should
a.
specialize in electronics production, export electronics, and import food.
b.
produce neither good because it has an absolute disadvantage in the production of both goods.
c.
produce both goods because neither country has a comparative advantage.
d.
specialize in food production, export food, and import electronics
 

 30. 

Refer to Figure 3-1.

      Figure 3-1
            The following table shows the units of output a worker can produce per month in Australia and Korea.
                              Food            Electronics
                  Australia          20                   5
                  Korea                  8                   2

            Prices of electronics can be stated in terms of units of food. What is the range of prices of electronics for which both countries could gain from trade? The price must be greater than:
a.
1/5 of a unit of food but less than 1/4 of a unit of food.
b.
4 units of food but less than 5 units of food.
c.
1/4 of a unit of food but less than 1/2 of a unit of food.
d.
2 units of food but less than 4 units of food.
 

 31. 

Suppose the world consists of two countries: the Germany and Spain. Further, suppose there are only two goods--food and clothing. Which of the following statements is true?
a.
If Germany has an absolute advantage in the production of food, then Spain must have an absolute advantage in the production of clothing.
b.
none of these answers.
c.
If Germany has a comparative advantage in the production of food, Spain might also have a comparative advantage in the production of food.
d.
If Germany has a comparative advantage in the production of food, it must also have a comparative advantage in the production of clothing.
e.
If Germany has a comparative advantage in the production of food, then Spain must have a comparative advantage in the production of clothing.
 

 32. 

Use the production possibilities frontiers in Exhibit 4 to answer the question.

mc032-1.jpg

Assume each country has the same number of workers, say 20 million, and that each axis is measured in metric tons per month. Argentina has a comparative advantage in the production of
a.
neither fruit nor beef.
c.
both fruit and beef.
b.
fruit.
d.
beef.
 

 33. 

Use the production possibilities frontiers in Exhibit 4 to answer the question.

mc033-1.jpg
           
Assume each country has the same number of workers, say 20 million, and that each axis is measured in metric tons per month. Peru will export
a.
both fruit and beef.
c.
fruit.
b.
beef.
d.
neither fruit nor beef.
 

 34. 

Use the production possibilities frontiers in Exhibit 4 to answer the question.

mc034-1.jpg

Assume each country has the same number of workers, say 20 million, and that each axis is measured in metric tons per month. The opportunity cost of producing a metric ton of beef in Peru is
a.
1/3 ton of fruit.
b.
6 tons of fruit.
c.
1 ton of fruit.
d.
2 tons of fruit.
e.
3 tons of fruit.
 

 35. 

Felipe is a tax accountant. He receives €100 per hour doing tax returns. He can type 10,000 characters per hour into spreadsheets. He can hire an assistant who types 2,500 characters per hour into spreadsheets. Which of the following statements is true?
a.
none of these answers.
b.
Felipe should hire the assistant as long as he pays the assistant less than €25 per hour.
c.
Felipe should not hire an assistant because the assistant cannot type as fast as he.
d.
Felipe should hire the assistant as long as he pays the assistant less than €100 per hour.
 



 
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