Chapter 3
Interdependence and the Gains from Trade
MULTIPLE CHOICE
1. People who provide you with goods and services a. are acting out of generosity. b. are acting because they like you. c. do so because they get something in return. d. are required to do so by government. ANSWER: c. do so because they get something in return. TYPE: M SECTION: 1 DIFFICULTY: 1 2.
A rancher can produce only hamburgers, and a farmer can produce only french fries. The rancher and the farmer both like both foods. They a. cannot gain from trade. b. could gain from trade under certain circumstances, but not always. c. could gain from trade because each would enjoy a greater variety of food. d. could gain from trade only if each were indifferent between hamburgers and french fries. ANSWER: c. could gain from trade because each would enjoy a greater variety of food. TYPE: M SECTION: 1 DIFFICULTY: 2 3.
Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes vases, but Regan is better at producing both. In this case, trade could a. benefit both Jayson and Regan. b. benefit Jayson, but not Regan. c. benefit Regan, but not Jayson. d. not benefit Jayson nor Regan. ANSWER: a. benefit both Jayson and Regan. TYPE: M SECTION: 1 DIFFICULTY: 2
4. Without trade a. a country is better off because it will become self-sufficient. b. a country’s production possibilities frontier is also its consumption possibilities frontier. c. a country can still benefit from international specialization. d. more product variety is available in a country. ANSWER: b. a country’s production possibilities frontier is also its consumption possibilities frontier. TYPE: M SECTION: 1 DIFFICULTY: 2
5. With trade a a. country is worse off because it becomes dependent on other countries. b. country will produce a greater variety of goods and services to trade. c. country’s consumption possibilities frontier can be outside its production possibilities frontier. d. country will experience a lower unemployment rate. ANSWER: c. country’s consumption possibilities frontier can be outside its production possibilities frontier. TYPE: M SECTION: 1 DIFFICULTY: 2
6. A country’s consumption possibilities frontier can be outside its production possibilities frontier if a. additional resources become available. b. there is an increase in the level of technology. c. the country engages in trade. d. All of the above are correct. e. Both a and b are correct. ANSWER: c. the country engages in trade. TYPE: M SECTION: 1 DIFFICULTY: 3
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60 ? Chapter 3/Interdependence and the Gains from Trade
7. A production possibilities frontier will be linear and not bowed out if a. no tradeoffs exist. b. the tradeoff between the two goods is always at a constant rate. c. unemployment is zero. d. resources are allocated efficiently. ANSWER: b. the tradeoff between the two goods is always at a constant rate. TYPE: M SECTION: 1 DIFFICULTY: 2 8.
The difference between production possibilities frontiers that are bowed out and those that are linear is that
a. bowed out production possibilities frontiers illustrate tradeoffs where linear production possibilities frontiers do
not.
b. bowed out production possibilities frontiers show increasing opportunity cost where linear ones show constant
opportunity cost.
c. bowed out production possibilities frontiers are the result of perfectly shiftable resources where linear
production possibilities frontiers are not.
d. linear production possibilities frontiers illustrate real world conditions more than bowed out production
possibilities frontiers.
ANSWER: b. bowed out production possibilities frontiers show increasing opportunity cost where linear ones show
constant opportunity cost.
TYPE: M SECTION: 1 DIFFICULTY: 3
9. Which of the following is NOT correct? a. Trade allows for specialization. b. Trade is good for nations. c. Trade is based on absolute advantage. d. Trade allows individuals to consume outside of their individual production possibilities curve. ANSWER: c. Trade is based on absolute advantage. TYPE: M SECTION: 2 DIFFICULTY: 2
10. If labor in Mexico is less productive than labor in the United States in all areas of production, a. neither nation can benefit from trade. b. Mexico can benefit from trade but the United States cannot. c. Mexico will not have a comparative advantage in any good. d. both nations can benefit from trade. ANSWER: d. both nations can benefit from trade. TYPE: M SECTION: 2 DIFFICULTY: 2
Labor Hours Needed to Make 1 Pound Pounds produced in 40 hours: of: Meat Potatoes Meat Potatoes Farmer Rancher 11. According to the table, the opportunity cost of 1 pound of meat for the farmer is a. 1/4 hour of labor. b. 4 hours of labor. c. 4 pounds of potatoes. d. 1/4 pound of potatoes. ANSWER: c. 4 pounds of potatoes. TYPE: M SECTION: 2 DIFFICULTY: 3
8 4 2 5 5 10 20 8
Chapter 3/Interdependence and the Gains from Trade ? 61
12. According to the table, the opportunity cost of 1 pound of meat for the rancher is a. 4 hours of labor. b. 5 hours of labor. c. 5/4 pounds of potatoes. d. 4/5 pound of potatoes. ANSWER: d. 4/5 pound of potatoes. TYPE: M SECTION: 2 DIFFICULTY: 3
13. According to the table, the opportunity cost of 1 pound of potatoes for the farmer is a. 8 hours of labor. b. 2 hours of labor. c. 4 pounds of meat. d. 1/4 pound of meat. ANSWER: d. 1/4 pound of meat. TYPE: M SECTION: 2 DIFFICULTY: 3
14. According to the table, the opportunity cost of 1 pound of potatoes for the rancher is a. 4 hours of labor. b. 5 hours of labor. c. 5/4 pounds of meat. d. 4/5 pound of meat. ANSWER: c. 5/4 pounds of meat. TYPE: M SECTION: 2 DIFFICULTY: 3
15. According to the table, the Farmer has an absolute advantage in a. meat, and the Rancher has an absolute advantage in potatoes. b. potatoes, and the Rancher has an absolute advantage in meat. c. meat, and the Rancher has an absolute advantage in meat. d. neither good, and the Rancher has an absolute advantage in both goods. ANSWER: b. potatoes, and the Rancher has an absolute advantage in meat. TYPE: M SECTION: 2 DIFFICULTY: 2
16. According to the table, the Rancher has an absolute advantage in a. both goods, and the Farmer has a comparative advantage in meat. b. meat, and the Farmer has a comparative advantage in potatoes. c. meat, and the Farmer has a comparative advantage in neither good. d. both goods, and the Farmer has a comparative advantage in potatoes. ANSWER: b. meat, and the Farmer has a comparative advantage in potatoes. TYPE: M SECTION: 2 DIFFICULTY: 3
17. According to the table, the Farmer has an absolute advantage in a. potatoes, and the Rancher has a comparative advantage in meat. b. meat, and the Rancher has a comparative advantage in potatoes. c. neither good, and the Rancher has a comparative advantage in potatoes. d. neither good, and the Rancher has a comparative advantage in meat. ANSWER: a. potatoes, and the Rancher has a comparative advantage in meat. TYPE: M SECTION: 2 DIFFICULTY: 3
18. According to the table, the Rancher has a comparative advantage in a. neither good, and the Farmer has a comparative advantage in both goods. b. both goods, and the Farmer has a comparative advantage in neither good. c. meat, and the Farmer has a comparative advantage in potatoes. d. potatoes, and the Farmer has a comparative advantage in meat. ANSWER: c. meat, and the Farmer has a comparative advantage in potatoes. TYPE: M SECTION: 2 DIFFICULTY: 3
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19. According to the table, the Farmer and Rancher both could benefit by the Farmer specializing in a. meat and the Rancher specializing in potatoes. b. potatoes and the Rancher specializing in meat. c. neither good and the Rancher specializing in both goods. d. They cannot benefit by specialization and trade. ANSWER: b. potatoes and the Rancher specializing in meat. TYPE: M SECTION: 2 DIFFICULTY: 2
20. According to the graph, if Paul divides his time equally between corn and wheat, he will be able to produce a. 2 bushels of wheat and 2 bushels of corn. b. 3 bushels of wheat and 3 bushels of corn. c. 4 bushels of wheat and 5 bushels of corn. d. 4 bushels of wheat and 6 bushels of corn. ANSWER: c. 4 bushels of wheat and 5 bushels of corn. TYPE: M SECTION: 2 DIFFICULTY: 2
21. According to the graph, the opportunity cost of 1 bushel of wheat for Cliff is a. 1/3 bushel of corn. b. 2/3 bushel of corn. c. 1 bushel of corn. d. 3/2 bushels of corn. ANSWER: b. 2/3 bushel of corn. TYPE: M SECTION: 2 DIFFICULTY: 2 22.
According to the graph, assume that both Paul and Cliff divide their time equally between the production of corn and wheat, and they do not trade. If they were the only producers of corn and wheat, then total production of wheat and corn would be a. 8 bushels of wheat and 7 bushels of corn. b. 7 bushels of wheat and 6 bushels of corn. c. 6 bushels of wheat and 8 bushels of corn. d. 7 bushels of wheat and 7 bushels of corn. ANSWER: d. 7 bushels of wheat and 7 bushels of corn. TYPE: M SECTION: 2 DIFFICULTY: 3
Chapter 3/Interdependence and the Gains from Trade ? 63
23.
According to the graph, assume that Cliff and Paul were both producing wheat and corn, and each were dividing their time equally between the two. Then they decide to specialize in the product they have a comparative advantage in. As a result, total production of corn would a. increase by 1 bushel. b. increase by 3 bushels. c. increase by 5 bushels. d. decrease by 2 bushels. ANSWER: b. increase by 3 bushels. TYPE: M SECTION: 2 DIFFICULTY: 3 24.
According to the graph, assume that Cliff and Paul were both producing wheat and corn, and each were dividing their time equally between the two. Then they decide to specialize in the product they have a comparative advantage in and trade 3 bushels of wheat for 3 bushels of corn. Cliff would now be able to consume. a. 4 bushels of wheat and 3 bushels of corn. b. 3 bushels of wheat and 4 bushels of corn. c. 3 bushels of wheat and 3 bushels of corn. d. 2 bushels of wheat and 3 bushels of corn. ANSWER: c. 3 bushels of wheat and 3 bushels of corn. TYPE: M SECTION: 2 DIFFICULTY: 3
25. According to the graph, which of the following is true for Cliff and Paul? a. Paul has an absolute advantage in both wheat and corn. b. Paul has an absolute advantage in wheat and Cliff has an absolute advantage in corn. c. Cliff has an absolute advantage in wheat and Paul has an absolute advantage in corn. d. Cliff has an absolute advantage in both wheat and corn. ANSWER: a. Paul has an absolute advantage in both wheat and corn. TYPE: M SECTION: 2 DIFFICULTY: 2
26. According to the graph, which of the following is true for Cliff and Paul? a. Paul has a comparative advantage in both wheat and corn. b. Paul has a comparative advantage in wheat and Cliff has a comparative advantage in corn. c. Cliff has a comparative advantage in wheat and Paul has a comparative advantage in corn. d. Cliff has a comparative advantage in both wheat and corn. ANSWER: c. Cliff has a comparative advantage in wheat and Paul has a comparative advantage in corn. TYPE: M SECTION: 2 DIFFICULTY: 3
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