1.
Practice Problems – Chapters 15 and 13
A nation has a comparative advantage in producing a good if it has a lower opportunity cost of
producing that good than other countries have.
a. True
b. False
ANS: A
2. Suppose that a nation has an absolute advantage in the production of all goods. In this instance, it
a. has no incentive to engage in international trade
b. is producing at a point on its production possibilities frontier
c. has no unemployment
d. also has a comparative advantage in the production of those goods
e. should specialize in producing the goods for which it has a lower opportunity cost than
other countries
ANS: E
Figure 15-1
Number of workers needed to produce
one unit of each of the following goods:
Korea
Colombia
1 Radio
3
4
1 Calculator
6
2
3. What can be said regarding absolute advantage in production for the two countries shown in
Figure 15-1?
a. Colombia has an absolute advantage in producing both calculators and radios.
b. Korea has an absolute advantage only in producing calculators.
c. Korea has an absolute advantage in producing both radios and calculators.
d. Neither country has an absolute advantage in producing radios.
e. Colombia has an absolute advantage only in producing calculators.
ANS: E
4.
Assume Japan must forego producing 60 computers for each automobile it produces. Moreover,
the United States can produce one automobile if it forgoes producing 80 computers. Which of the
following is true?
a. The United States has a lower opportunity cost of producing automobiles.
b. The United States has a comparative advantage in producing automobiles.
c. Japan has a comparative advantage in producing computers.
d. No trade will occur between Japan and the United States.
e. Japan has a lower opportunity cost of producing automobiles.
ANS: E
5. Comparative advantage is determined by the
a. elasticities of demand for a good in two countries
b. opportunity costs of producing a good in two different countries
c. presence of absolute advantages in production
d. degrees of allocative efficiency within each economy
e. amounts of resources required to produce a good in different countries
ANS: B
6. For each watch Switzerland produces, it gives up the opportunity to produce 50 pounds of cheese.
Germany can produce one watch at a cost of 100 pounds of cheese. Which of the following is
true?
a. The opportunity cost of producing watches is lower in Switzerland.
b. The opportunity cost of producing cheese is lower in Switzerland.
c. The opportunity cost of producing watches is the same in both countries.
d. It is impossible to compare costs because the two countries are not the same size.
e. In Germany, the cost of a pound of cheese is one watch.
ANS: A
7. Consider the following information on labor hours needed per unit of output:
Computers
Wine
France
50
25
Italy
40
10
Ignoring nonlabor inputs, which of the following statements is correct?
a. France has an absolute advantage in the production of both goods.
b. France has a comparative advantage in the production of both goods.
c. The opportunity cost of a computer in Italy is 4 units of wine.
d. The opportunity cost of a unit of wine in France is 2 computers.
e. France produces more computers that Italy produces wine.
ANS: C
8. Consider the following table on labor hours needed per unit of output:
Computers
Wine
France
50
25
Italy
40
10
Ignoring nonlabor inputs, which of the following statements is correct?
a. All of the following are correct.
b. The opportunity cost of a computer equals 1/4 unit of wine in Italy.
c. The opportunity cost of a computer equals 1/2 unit of wine in France.
d. Italy has a comparative advantage in computers.
e. Italy has a comparative advantage in wine.
ANS: E
9. For each watch Denmark produces, it gives up the opportunity to produce 50 pounds of cheese.
France can produce two watches at a cost of 150 pounds of cheese. Which of the following is
true?
a. Denmark has a comparative advantage in producing both watches and cheese.
b. France has a comparative advantage in producing both watches and cheese.
c. France has the comparative advantage in producing watches.
d. Denmark has the comparative advantage in producing watches.
e. Denmark has the comparative advantage in producing cheese.
ANS: D
10. International trade
a. reduces world output of goods and services
b. lowers economic efficiency
c. allows countries to specialize in producing particular products
d. creates opportunity cost differentials in production
e. shifts each economy's production possibilities frontier inward
ANS: C
11.
The terms of trade
a. equal the ratio of opportunity costs of production in two countries
b. equal the ratio of marginal production costs in two countries
c. is the quantity of one good that is exchange that is exchanged for one unit of another good
d. are determined by absolute advantage
e. equal the ratio of average production costs in two countries
ANS: C
12. Suppose that the opportunity cost of producing a rocking chair in Mexico is 50 basketballs and
the opportunity cost of a rocking chair in Japan is 80 basketballs. Japan and Mexico can realize
mutual gains if the terms of trade are
a. greater than 80 basketballs per rocking chair, and Japan produces rocking chairs
b. between 50 and 80 basketballs per rocking chair, and Japan produces basketballs
c. greater than 80 basketballs per rocking chair, and Mexico produces basketballs
d. less than 50 basketballs per rocking chair, and Japan produces basketballs
e. between 50 and 80 basketballs per rocking chair, and Japan produces rocking chairs
ANS: B
13. The cost of producing a car in Germany is 2,000 bushels of wheat, and the cost of producing a car
in Canada is 1,200 bushels of wheat. The two countries can both benefit if the terms of trade are
a. greater than 2,000 of wheat per car
b. less than 1,200 bushels of wheat per car
c. between 1,200 bushels and 2,000 bushels of wheat per car, and Germany produces wheat
d. between 1,200 bushels and 2,000 bushels of wheat per car, and Germany produces cars
e. between 1,200 bushels and 2,000 bushels of wheat per car, and Canada produces wheat
ANS: C
14. If there are high transportation costs
a. the terms of trade will also be high
b. the result could be incomplete specialization
c. large countries will have an advantage in trading with small countries
d. small countries will have an advantage in trading with large countries
e. trade will be based on absolute advantage rather than comparative advantage
ANS: B
15. A country that has relatively large amounts of a particular resource at its disposal
a. will tend to have an absolute advantage
b. will trade the resource for some good in which that country has an absolute advantage
c. will tend to have a comparative advantage in goods that make heavy use of that resource
d. will trade the resource for some good in which that country has a comparative advantage
e. will tend to have a low exchange rate
ANS: C
16. When a nation begins to export a good,
a. the domestic price of that good falls
b. less of that good is produced domestically
c. the domestic producers are made better off
d. the domestic consumers are made better off
e. both domestic and foreign consumers will purchase more of it
ANS: C
17. When a nation begins to import a good,
a. the domestic price of that good will fall
b. domestic consumers are harmed
c. the domestic price of that good will rise
d. domestic producers benefit
e. the quantity produced domestically will rise
ANS: A
18. If Japan imposes a tariff on shoes from Argentina, then
a. the price of Argentinean shoes sold in Japan will fall
b. the quantity of Argentinean shoes sold in Japan will rise
c. Japanese shoe producers will benefit
d. Japanese consumers will benefit from lower prices for Japanese shoes
e. Japanese consumers will benefit from lower prices for Argentinean shoes
ANS: C
19.
One reason why there may be a bias against free trade is that
a. those harmed by trade have a powerful incentive to lobby against it
b. people prefer domestically-produced goods to foreign-produced goods
c. people prefer foreign-produced goods to domestically-produced goods
d. the terms of trade are too low
e. the exchange rate is too high
ANS: A
20. A quota is a
a. tax imposed on each unit of an exported good
b. tax imposed on each unit of an imported good
c. change in the terms of trade between two nations
d. result of opportunity cost differentials between two nations
e. restriction on the quantity of a good that may be imported
ANS: E
21. One advantage of a tariff over a quota, from the perspective of the nation imposing it, is that a
tariff
a.
b.
c.
d.
e.
decreases the domestic price
increases the foreign price
increases the quantity of imports
decreases the quality of imports
raises tax revenue
ANS: E
22. The amount of money that someone would pay today for the right to receive a future payment is
called
a. the present value of the future payment
b. the determinate value of the future payment
c. the interest rate
d. the principal
e. the time discount
ANS: A
23. If the interest rate is 5 percent (0.05) per year, what is the present value of $3,000 to be received
two years from now?
a. $2,850.00
b. $3,000.00
c. $2,707.50
d. $2,721.09
e. $2,857.14
ANS: D
24. A new business computer will generate net income of $1,000 this year, $800 next year, $400 the
year after that, and nothing thereafter. Assume that each year's income is received at the end of
the year. What is the maximum amount a firm would be willing to pay for the computer?
a. more than $2,200
b. $2,200
c. $1,000
d. between $1,000 and $2,200
e. less than $1,000
ANS: D
25. A financial asset is
a. a unit of physical capital with a positive market value
b. any asset that generates a stream of income
c. a share in the ownership of a productive enterprise
d. a form of money
e. a promise to pay future income in some form
ANS: E
26.
What is the value of a newly issued 10-year bond with face value of $10,000 and no coupon
payments? Assume the interest rate is 7 percent (0.07) per year.
a. $0
b. $5,083.49
c. $10,000
d. $95,632.41
e. $100,000.00
ANS: B
27. Which of the following will lower the present value of a bond?
a. a fall in the interest rate
b. an increase in the principal
c. a shorter time to maturity
d. an increased risk of default
e. none of the above
ANS: D
28. Which of the following will increase the yield on a bond?
a. a reduction principal
b. an increased risk of default
c. an increase in the bond's price
d. a reduced risk of default
e. none of the above
ANS: B
29. Which of the following is a correct statement about bond prices, other things equal?
a. a lower face value leads to a higher bond price
b. a higher risk of default leads to a higher bond price
c. a higher risk of default leads to a lower yield
d. fewer coupon payments lead to a higher bond price
e. a higher price leads to a lower yield
ANS: E
30. The key difference between a share of stock and a bond is that
a. a share of stock is a riskless asset
b. the holder of a bond receives only one future payment
c. the holder of a share stock has a share in the ownership of a firm
d. bonds are issued only by the government, while stock is issued only by corporations
e. there are secondary markets for stocks, but not for bonds
ANS: C
31. Which of the following would increase the value of a firm's stock?
a. a decrease in the firm's present profit
b. a decrease in the anticipated growth rate of future profits
c. an increase in the perceived riskiness of future profits
d. a fall in the interest rate
e. an anticipated increase in the interest rate
ANS: D
32.
The key difference between the primary and secondary bond markets is that _________ bonds are
traded on the primary market, while _________ bonds are traded on the secondary market.
a. newly issued; previously issued
b.
c.
d.
e.
government; corporate
more valuable; less valuable
low risk; high risk
high yield; low yield
ANS: A