Chapter 5 Econ

Comparative advantage arises from: a) differences in climate, factor endowments, and technology. b) absolute advantage. c) countries engaging in autarkic behavior. d) an emphasis on export production.

a) differences in climate, factor endowments, and technology. Explanation: By definition, comparative advantage exists when a trading partner has the lower relative opportunity cost of production. Each of the factors listed here would result in a lower relative opportunity cost of production.

According to the Heckscher-Ohlin model, Brazil will have a comparative advantage in oranges if the factors _____ in the production of oranges are _____. a) intensive; abundant b) intensive; imported c) that are scarce; imported d) intensive; inexpensive

a) intensive; abundant Explanation: This is a straightforward definition. Countries that have greater endowments of goods experience lower relative opportunity costs of producing those goods.

The job creation argument for protection against free trade: a) is that keeping out foreign imports allows the goods and services to be produced by domestic workers. b) is frequently put forward by economists. c) is mostly that we need full employment to defend the security of the nation. d) is that we need full employment to prevent currency depreciation.

a) is that keeping out foreign imports allows the goods and services to be produced by domestic workers. Explanation: This is a straight-forward definition. Trade protection raises the price charged to consumers, thereby making them worse off. The only offsetting argument is that doing so helps domestic workers more than it hurts domestic consumers.

(Scenario: The Production of Wheat and Toys) Look at the scenario Production of Wheat and Toys. If each country specializes in the good for which it has the comparative advantage, then the price of wheat in terms of toys will be: a) between two units of toys and one-third unit of toys. b) between two units of toys and three units of toys. c) three units of toys. d) between one-third unit of toys and one-half unit of toys.

b) between two units of toys and three units of toys. Explanation: The respective opportunity costs for the two countries represent the upper and lower bounds of the acceptable terms of trade. In country A, 𝑀𝐶(𝑊) = −100𝑇 +50𝑊 = −2𝑇 +1𝑊 and in country B 𝑀𝐶(𝑊) = −75𝑇 +25𝑊 = −3𝑇 +1𝑊 . Hence, country A has the comparative advantage in Wheat and will choose to produce only wheat, while country B has the comparative advantage in toys and will produce only toys. Looking at the relative opportunity costs, we see that country A will accept a minimum number of 2 toys in exchange for 1 wheat (its opportunity cost) and that country B will be willing to pay a maximum of 3 toys in exchange for 1 wheat (its opportunity cost).

(Figure: The Domestic Supply and Demand for SUVs in the United States) Look at the figure The Domestic Supply and Demand for SUVs in the United States. Suppose the world price equals $50,000 and there is free trade. The United States would _____ SUVs. a) import 6 million b) export 6 million c) export 2 million d) import 2 million

b) export 6 million Explanation: The domestic equilibrium price is $42,500, which is less than the world price of $50,000. When the world price exceeds the domestic price, domestic producers will wish to sell their products overseas, where they can earn the higher price, meaning that they will choose to export. The amount that they will do so is the difference between the quantity supplied and quantity demanded at that price (10 million - 4 million).

If a nation exports a good when the economy is opened to trade, relative to the autarky price, the domestic price of the good will _____ and domestic consumption will _____. a) rise; rise b) rise; fall c) fall; rise d) fall; fall

b) rise; fall

Mexico produces lettuce but can also import it. If Mexico imports some lettuce: a) Mexico has a comparative advantage in lettuce production. b) the world price is lower than the domestic price. c) the price in Mexico will rise to equal the world price. d) the domestic quantity supplied will increase.

b) the world price is lower than the domestic price. Explanation: Countries only import if doing so makes them better off, which happens only if the price of the imported good is lower than the domestic price.

The main difference between a tariff and an import quota is that: a) an import quota reduces imports more sharply than a tariff. b) a tariff will cause higher prices than an import quota. c) a tariff generates tax revenue, while an import quota generates rents to the license holders. d) a tariff will cause lower prices than an import quota.

c) a tariff generates tax revenue, while an import quota generates rents to the license holders. Explanation: This is a straight-forward definition. Tariffs are taxes paid to the government. Quotas have the same effect on price but the increase is not paid to the government and is instead kept by the firm.

(Table: Production Possibilities for Machinery and Petroleum) Look at the table Production Possibilities for Machinery and Petroleum. The opportunity cost of _____ is _____ in the United States as (than) in Mexico. a) machinery; more b) machinery; the same c) machinery; less d) petroleum; less

c) machinery; less Explanation: In the US, 𝑀𝐶(𝑀) = −40𝑃 80𝑀 = −1⁄2𝑃 +1𝑀 . In Mexico, 𝑀𝐶(𝑀) = −180𝑃 60𝑀 = −3𝑃 +1𝑀 . Hence the opportunity cost of machinery is less in the US(− 1 2 𝑃) than it is in Mexico (−3𝑃).

The United States must give up the production of 500 bicycles to produce 20 additional tractors. The opportunity cost of producing 5 tractors is _____ bicycles. a) 5 b) 20 c) 100 d) 125

d) 125 Explanation: 𝑀𝐶(𝑇) = −500𝐵 20𝑇 = −25𝐵 +1𝑇 . Therefore, the cost of producing 5 tractors = 5 * 25 = 125.

(Figure: Comparative Advantage and the Production Possibility Frontier) Look at the figure Comparative Advantage and the Production Possibility Frontier. _____ has an absolute advantage in the production of _____ and a comparative advantage in the production of _____. a) The United States; computers; roses b) Colombia; computers; roses c) The United States; roses; computers d) Colombia; roses; roses

d) Colombia; roses; roses Explanation: If both countries devote all of their resources to producing rose, Colombia produces 2,000 and the US produces 1,000. Therefore, Colombia has an absolute advantage in the production of roses. In the US, 𝑀𝐶(𝑅) = −2,000𝐶 1,000𝑅 = −2𝐶 +1𝑅 . In Colombia, 𝑀𝐶(𝑅) = −1,000𝐶 2,000𝑅 = −.5𝐶 +1𝑅 . Hence, Colombia has the comparative advantage in producing roses because it has the lower relative marginal cost of producing roses.

Assume that the United States imposes an import quota on Columbian coffee. Relative to the equilibrium world price that would prevail in the absence of import quotas, it is likely that the equilibrium price of coffee in the United States will _____ and the equilibrium price of coffee in Columbia will _____. a) decrease; remain the same b) remain the same; increase c) increase; increase d) increase; decrease

d) increase; decrease Explanation: See explanation #9. Just like tariffs, import quotas reduce the quantity imported, thereby increasing the quantity produced by domestic producers. This reduction in imports increases the price of the imported good in the U.S. and the fact that the foreign market less quantity is leaving the foreign market increase the quantity supplied abroad, thereby decreasing the price in the foreign market.

If a market begins to engage in international trade, we can assume that: a) producers in the exporting industry may be worse off. b) consumers of the imported good may be worse off. c) consumers of the exported good may be better off. d) producers in the importing industry may be worse off

d) producers in the importing industry may be worse off. Explanation: Countries only import a good if its price is less than the domestic price. Importing the goods causes the price to fall and the domestic quantity supplied to fall. As such, because they are selling fewer units at a lower price per unit, domestic producers are worse off.

(Figure: A Tariff on Oranges in South Africa) Look at the figure A Tariff on Oranges in South Africa. When the government imposes a tariff on imported oranges, the price of oranges in South Africa rises from PW to PT and domestic producer surplus _____ to _____. a) falls; G + I b) falls; G + I + J + K c) rises; G + + J + K d) rises; G + H

d) rises; G + H Explanation: The tariff is designed to increase the price of imported goods, which increases the world price, thereby increasing the domestic quantity supplied and decreasing the domestic quantity demanded. The increase in quantity supplied and price increases producer surplus by G + H.