ECO 391 Exam 2 | Actual study set |
Questions and verified Answers
Which of the following is true?
A) Adam Smith proposed the theory of comparative advantage as the basis for trade in The Wealth of
Nations.
B) David Ricardo proposed the theory of absolute advantage as the basis for trade.
C) Absolute advantage is based on comparing the opportunity costs of trading partners.
D) The Ricardian model assumes labor is perfectly mobile. - ANSW-D
The economic philosophy that favors strict limits on imports and strong support for exports is called
A) zero sum.
B) mercantilism.
C) comparative advantage.
D) absolute advantage. - ANSW-B
US. U.K
Wheat 12 6
Cloth 6 18
The table above shows United States and United Kingdom production of wheat (bushels per hour) and
cloth (yards per hour).
According to Adam Smith, which of the following is true?
A) The United States has an absolute advantage in the production of wheat.
B) The United States has an absolute advantage in the production of cloth.
C) There is no basis for trade between these countries.
D) The United States will gain more from trade than the United Kingdom. - ANSW-A
US. U.K
Wheat 12 6
Cloth 6 18
The table above shows United States and United Kingdom production of wheat (bushels per hour) and
cloth (yards per hour).
In order for both countries to gain from trade, one bushel of wheat must trade for
A) between 6 and 18 yards of cloth.
,B) between 1/2 and 2 yards of cloth.
C) between 1/3 and 3 yards of cloth.
D) between 1/2 and 1/3 yards of cloth. - ANSW-D
A country will gain relatively more from trade when
A) trade is regulated.
B) the world price is close to the country's opportunity cost of the good.
C) the world price is below the country's opportunity cost of the good.
D) the world price is much greater than the country's opportunity cost for the good. - ANSW-D
Mercantilists perceived trade as a zero sum game.
True/False - ANSW-True
Adam Smith created the theory of comparative advantage.
True/False - ANSW-False
What type of policies did Adam Smith attack in his book, An Inquiry into the Nature and Causes of the
Wealth of Nations? - ANSW-Mercantilism
What did Adam Smith perceive was primarily responsible for improving standard of living? - ANSW-
Increased specialization in production
What is productivity? - ANSW-The amount of output from a unit of an input
In the simple trade model, what is assumed about labor? - ANSW-It is perfectly mobile between the two
industries within a nation.
Which economist introduced the simple trade model and the concept of trade based on comparative
advantage? - ANSW-David Ricardo
Why did Adam Smith criticize the trade barriers imposed by the mercantilists? - ANSW-Smith was highly
critical of trade barriers because they decrease specialization, technological progress, and wealth
creation. He also recognized that imports enable a country to obtain goods that it cannot make or
cannot make as cheaply, while exports are made for someone else and are useful only if they lead to
imports.
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20
corn. If opportunity costs are constant for both countries, then
A) the United States has a comparative advantage in corn production.
B) Mexico has a comparative advantage in corn production.
C) the United States cannot gain from trade with Mexico.
D) the United States has a comparative advantage in auto production. - ANSW-A
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20
corn. If opportunity costs are constant for both countries, which of the following would NOT be a
potential terms of trade?
A) 1 auto for 3 corn
B) 1 auto for 4 corn
, C) 1 corn for 1/3 of an auto
D) 1 corn for 1 auto - ANSW-D
Suppose Paraguay can produce 12 wheat or 3 corn. Suppose Bolivia can produce 4 wheat or 2 corn.
Suppose opportunity costs are constant. Given these production possibilities,
A) Paraguay has a comparative advantage in wheat.
B) Paraguay has a comparative advantage in corn.
C) Paraguay has a comparative advantage in both goods.
D) Paraguay has an absolute advantage in neither good. - ANSW-A
Suppose that Paraguay can produce 12 wheat or 3 corn and Bolivia can produce 4 wheat or 2 corn.
Suppose that opportunity costs are constant. Which of the following is a potentially agreeable trade
arrangement for Paraguay and Bolivia?
A) Paraguay trades one corn to Bolivia for three units of wheat.
B) Bolivia trades one corn to Paraguay for three units of wheat.
C) Bolivia trades one corn to Paraguay for one wheat.
D) Paraguay trades one wheat to Bolivia for two corn. - ANSW-B
Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film.
Suppose that opportunity costs are constant. Which of the following is FALSE?
A) Canada has an absolute advantage in timber production.
B) Mexico has a comparative advantage in film production.
C) The opportunity costs for producing timber are lower in Canada than in Mexico.
D) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to six units
of timber. - ANSW-D
Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can
produce 6 units of timber or 2 units of grain. Which of the following is CORRECT?
A) Mexico has a comparative advantage in grain production.
B) Mexico has an absolute advantage in timber production.
C) Canada has a comparative advantage in grain production.
D) The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber. - ANSW-A
Suppose that Sandy can produce 10 economic reports or make 2 sales calls. Suppose Tim can produce 2
economic reports or make 1 sales call. Which of the following is CORRECT?
A) The opportunity cost for Sandy of producing one economics report is 1/5 of a sales call.
B) The opportunity cost for Sandy of producing one sales call is 10 economics reports.
C) The opportunity cost for Tim of producing one sales call is 1/2 of an economics report.
D) The opportunity cost for Tim of producing one economics report is 2 sales calls. - ANSW-A
Given that Sandy can produce 10 economics reports or make 2 sales calls and Tim can produce 2
economics reports or make 1 sales call, we can conclude that
A) Sandy should specialize in economics reports, and Tim should specialize in sales calls.
B) Sandy should produce both economics reports and sales calls since she cannot possibly gain from
trade with Tim.
Questions and verified Answers
Which of the following is true?
A) Adam Smith proposed the theory of comparative advantage as the basis for trade in The Wealth of
Nations.
B) David Ricardo proposed the theory of absolute advantage as the basis for trade.
C) Absolute advantage is based on comparing the opportunity costs of trading partners.
D) The Ricardian model assumes labor is perfectly mobile. - ANSW-D
The economic philosophy that favors strict limits on imports and strong support for exports is called
A) zero sum.
B) mercantilism.
C) comparative advantage.
D) absolute advantage. - ANSW-B
US. U.K
Wheat 12 6
Cloth 6 18
The table above shows United States and United Kingdom production of wheat (bushels per hour) and
cloth (yards per hour).
According to Adam Smith, which of the following is true?
A) The United States has an absolute advantage in the production of wheat.
B) The United States has an absolute advantage in the production of cloth.
C) There is no basis for trade between these countries.
D) The United States will gain more from trade than the United Kingdom. - ANSW-A
US. U.K
Wheat 12 6
Cloth 6 18
The table above shows United States and United Kingdom production of wheat (bushels per hour) and
cloth (yards per hour).
In order for both countries to gain from trade, one bushel of wheat must trade for
A) between 6 and 18 yards of cloth.
,B) between 1/2 and 2 yards of cloth.
C) between 1/3 and 3 yards of cloth.
D) between 1/2 and 1/3 yards of cloth. - ANSW-D
A country will gain relatively more from trade when
A) trade is regulated.
B) the world price is close to the country's opportunity cost of the good.
C) the world price is below the country's opportunity cost of the good.
D) the world price is much greater than the country's opportunity cost for the good. - ANSW-D
Mercantilists perceived trade as a zero sum game.
True/False - ANSW-True
Adam Smith created the theory of comparative advantage.
True/False - ANSW-False
What type of policies did Adam Smith attack in his book, An Inquiry into the Nature and Causes of the
Wealth of Nations? - ANSW-Mercantilism
What did Adam Smith perceive was primarily responsible for improving standard of living? - ANSW-
Increased specialization in production
What is productivity? - ANSW-The amount of output from a unit of an input
In the simple trade model, what is assumed about labor? - ANSW-It is perfectly mobile between the two
industries within a nation.
Which economist introduced the simple trade model and the concept of trade based on comparative
advantage? - ANSW-David Ricardo
Why did Adam Smith criticize the trade barriers imposed by the mercantilists? - ANSW-Smith was highly
critical of trade barriers because they decrease specialization, technological progress, and wealth
creation. He also recognized that imports enable a country to obtain goods that it cannot make or
cannot make as cheaply, while exports are made for someone else and are useful only if they lead to
imports.
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20
corn. If opportunity costs are constant for both countries, then
A) the United States has a comparative advantage in corn production.
B) Mexico has a comparative advantage in corn production.
C) the United States cannot gain from trade with Mexico.
D) the United States has a comparative advantage in auto production. - ANSW-A
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20
corn. If opportunity costs are constant for both countries, which of the following would NOT be a
potential terms of trade?
A) 1 auto for 3 corn
B) 1 auto for 4 corn
, C) 1 corn for 1/3 of an auto
D) 1 corn for 1 auto - ANSW-D
Suppose Paraguay can produce 12 wheat or 3 corn. Suppose Bolivia can produce 4 wheat or 2 corn.
Suppose opportunity costs are constant. Given these production possibilities,
A) Paraguay has a comparative advantage in wheat.
B) Paraguay has a comparative advantage in corn.
C) Paraguay has a comparative advantage in both goods.
D) Paraguay has an absolute advantage in neither good. - ANSW-A
Suppose that Paraguay can produce 12 wheat or 3 corn and Bolivia can produce 4 wheat or 2 corn.
Suppose that opportunity costs are constant. Which of the following is a potentially agreeable trade
arrangement for Paraguay and Bolivia?
A) Paraguay trades one corn to Bolivia for three units of wheat.
B) Bolivia trades one corn to Paraguay for three units of wheat.
C) Bolivia trades one corn to Paraguay for one wheat.
D) Paraguay trades one wheat to Bolivia for two corn. - ANSW-B
Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film.
Suppose that opportunity costs are constant. Which of the following is FALSE?
A) Canada has an absolute advantage in timber production.
B) Mexico has a comparative advantage in film production.
C) The opportunity costs for producing timber are lower in Canada than in Mexico.
D) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to six units
of timber. - ANSW-D
Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can
produce 6 units of timber or 2 units of grain. Which of the following is CORRECT?
A) Mexico has a comparative advantage in grain production.
B) Mexico has an absolute advantage in timber production.
C) Canada has a comparative advantage in grain production.
D) The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber. - ANSW-A
Suppose that Sandy can produce 10 economic reports or make 2 sales calls. Suppose Tim can produce 2
economic reports or make 1 sales call. Which of the following is CORRECT?
A) The opportunity cost for Sandy of producing one economics report is 1/5 of a sales call.
B) The opportunity cost for Sandy of producing one sales call is 10 economics reports.
C) The opportunity cost for Tim of producing one sales call is 1/2 of an economics report.
D) The opportunity cost for Tim of producing one economics report is 2 sales calls. - ANSW-A
Given that Sandy can produce 10 economics reports or make 2 sales calls and Tim can produce 2
economics reports or make 1 sales call, we can conclude that
A) Sandy should specialize in economics reports, and Tim should specialize in sales calls.
B) Sandy should produce both economics reports and sales calls since she cannot possibly gain from
trade with Tim.
