Econ 601: Basic Economic Analysis
Assignment #6
Answer questions on separate pieces of paper – staple all pages. Make sure that
your name and student ID number are on all pages.
Multiple Choice Questions
1) After trade has opened up, the gains from trade brings to consumers of the imported good are, in
absolute value,
a.
b.
c.
d.
larger than the losses to domestic producers of that good.
smaller than the losses to domestic producers of that good.
exactly equal to the losses to domestic producers of that good.
immeasurable.
2) All but ONE of the following is likely to promote free trade in lumber between countries:
a.
b.
c.
d.
pre-trade lumber prices that are equal across countries.
Profit-seeking lumber arbitrageurs.
Lumber supply differences across countries.
Lumber demand differences across countries.
3) Consumer surplus is
a.
b.
c.
d.
what consumers must pay the government to produce goods.
what consumers can get below the market price.
what it is worth to consumers to be able to buy the product at a price lower than the price some of
them would be willing and able to pay.
what they can get at all prices.
4) After trade, the distribution of income in a country changes as
a.
b.
c.
d.
import-competing producers lose while producers of the exportable good gain.
The nation as a whole gains while individuals may lose.
Consumers lose while producers gain.
Income flows from consumers to producers.
5) In the absence of trade, the consumption points available to a nation
a. are above the production possibilities curve.
b. are on or inside the production possibilities curve.
c. lie on the production possibilities curve.
d. cannot be identified.
6) If the world price for a good is above a nation’s pre-trade equilibrium price, then the nation
a.
b.
c.
d.
e.
will export the good.
will import the good.
will neither export nor import the good.
cannot gain from trade.
both C and D.
7) If a nation has no absolute advantage, then
a.
b.
c.
d.
it cannot gain from trade.
it still gains from trade.
it can only gain from trade if it raises its productivity levels.
it can only gain from trade if it reduces wages paid.
8) The U.S.’s comparative advantage over Japan in the production of wheat implies that (for a similar
quality of wheat) the
a.
b.
c.
d.
opportunity cost of production is less in Japan.
absolute cost of production is less in the US.
absolute cost of production is less in Japan.
opportunity cost of production is less in the US
9) Certain kinds of tropical fruits are impossible to grow outdoors in the US. Suppose however that in
order to create jobs in Wyoming, the US government offered extensive subsidies to firms there to produce
bananas. With the subsidies, Wyoming firms could build greenhouses and offer the fruit at world prices.
a.
b.
c.
d.
The US now has a comparative advantage in bananas.
The US has a comparative advantage but is not competitive.
The US is competitive but does not have a comparative advantage.
The US has both a comparative advantage and is competitive.
10) When comparing the US and Mexican car assembly industries, the disadvantage of higher US wages is
offset by
a.
b.
c.
Mexican trade barriers.
trade adjustment assistance in the US
higher productivity in the US
d. a lower opportunity cost in Mexico.
Analytical Questions
1) A tropical country can produce winter coats, but there is no domestic demand for these coats. Explain
how this country can gain from free trade in winter coats.
2) The equation for the demand and supply curves for writing paper in Belgium are:
Demand: P= 700 – 2QD
Supply: P= 40 + .2QS
a.
b.
c.
What are the equilibrium price and quantity if there is no international trade?
What are the equilibrium quantities for Belgium if the nation can trade freely with the rest of the
world at a price of 120?
What is the effect of the shift from autarky to free trade on Belgian consumer surplus? What is the
net national gain or loss for Belgium?
3) Use the chart to answer the following questions.
Vietnam
Costa Rica
Inputs per bushel of rice
75
50
Inputs per yard of cloth
100
50
You make several Ricardian assumptions: these are the only two commodities, there are constant ratios of
input to output whatever the output of rice and cloth, and competition prevails in all markets.
a. Who has the absolute advantage in producing cloth? Rice?
b. Who has the comparative advantage in cloth? Rice?
c. If no international trade was allowed, what autarky price ratio would prevail between cloth and rice in
Vietnam?
d. If free trade is allowed, what are the price limits for the equilibrium international price ratio? What
would Vietnam export? Import?
5. “For my country, imports are the good thing about international trade, whereas exports are more like the
necessary evil.” Do you agree or disagree? Why?