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Answer: B
Explanation: To produce one additional pound of food, it costs Country A 2 yards of textiles
(1200/600). Given it only costs Country B 1 yard of textiles (500/500), then Country B has a
relative advantage in producing food because 1 < 2. However, to produce one additional yard of
textiles, it costs Country A 0.5 pounds of food (600/1200) and it costs Country B 1 pound of food
(500/500). Thus, Country A has a relative advantage in producing textiles because 0.5 < 1.
Topic: Appendix: The Theory of Comparative Advantage
67) Countries A and B currently consume 400 units of food and 400 units of textiles each and
currently do not trade with one another. The citizens of country A have to give up one unit of food
to gain two units of textiles, while the citizens of country B have to give up one unit of textiles to
gain two units of food. Their production possibilities curves are shown.
Under the theory of comparative advantage
A) The citizens of country A should make food and trade with the citizens of country B for textiles.
B) The citizens of country A should make textiles and trade with the citizens of country B for food.
C) There are no gains from trade in this example.
D) A is twice as good as B at making food and B is twice as good as A at making textiles.
68) Counties A and B currently consume 400 units of food and 400 units of textiles each and
currently do not trade with one another. The citizens of country A have to give up one unit of food
to gain two units of textiles, while the citizens of country B have to give up one unit of textiles to
gain two units of food. Their production possibilities curves are shown.
Under the theory of comparative advantage, if free trade is allowed, the market clearing price (or
exchange rate, if you will) between food and textiles will be
A) one unit of food for one unit of textiles.
B) somewhere between one unit of food for two units of textiles and two units of food for one unit
of textiles.
C) one unit of food for two units of textiles.
D) two units of food for one unit of textiles.
69) Countries A and B currently consume 400 units of food and 400 units of textiles each and
currently do not trade with one another. The citizens of country A have to give up one unit of food
to gain two units of textiles, while the citizens of country B have to give up one unit of textiles to
gain two units of food. Their production possibilities curves are shown.
Suppose that trade is allowed and that the international exchange rate between food and textiles is
one-for-one. The increased consumption following trade will be
A) an increase of 400 units of food and 400 units of textiles.
B) an increase of 1,200 units of food and 1,200 units of textiles.
C) an increase of 800 units of food and 800 units of textiles.
D) there are no gains from trade in this example.
70) In modern times, it is not a country per se but rather a controller of capital and know-how that
gives the country in which it is domiciled a comparative advantage over another country. These
controllers of capital and technology are
A) the state.
B) the multinational corporations (MNCs).
C) portfolio managers of international mutual funds.
D) none of the options
71) International trade is
A) a “zero-sum” game in which one country benefits at the expense of another country.
B) an “increasing-sum” game at which all players become winners.
C) prone to both countries being worse off than had they not participated in international trade.
D) none of the options
72) The doctrine of comparative advantage was first put forth by
A) Adam Smith.
B) David Ricardo.
C) Ricky Ricardo.
D) none of the options
73) The comparative advantage argument in free trade
A) ignores the cost of readjustment.
B) is a short-run argument.
C) only works for two goods at a time.
D) none of the options
74) If you can make a good product at a low opportunity cost,
A) you would be well served to produce that good and trade for other goods.
B) you should make something else that has a higher value.
C) you should make something else that has a higher opportunity cost.
D) none of the options
75) A country like North Korea
A) likely rejects the notion of increased opportunity presented by free trade.
B) engages in free trade.
C) lies on a production possibilities curve superior to South Korea, since North Korea protects its
international producers.
D) none of the options
76) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
Which state has an absolute advantage in producing wheat in Case I?
A) South Dakota
B) North Dakota
C) Neither state
D) Both states
77) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
Which state has an absolute advantage in producing beer in Case I?
A) South Dakota
B) North Dakota
C) Neither state
D) Both states
78) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
Which state has an absolute advantage in producing beer in Case II?
A) South Dakota
B) North Dakota
C) Neither state
D) Both states
79) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
Which state has a comparative advantage in producing beer in Case I?
A) South Dakota
B) North Dakota
C) Neither state
D) Both states
80) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
Which state has a comparative advantage in wheat production in Case I?
A) South Dakota
B) North Dakota
C) Neither state
D) Both states
81) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
Which state has a comparative advantage in wheat production in Case II?
A) South Dakota
B) North Dakota
C) Neither state
D) Both states
82) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
What is the relative price of wheat in North Dakota prior to trade in Case II?
A) 2 bushels of wheat = ½ bottle of beer
B) ½ bushel of wheat = 2 bottles of beer
C) 1 bushel of wheat = ½ bottle of beer
D) 1 bushel of wheat = 2 bottles of beer
83) The table below shows the bushels of wheat and the bottles of beer that North and South
Dakota can produce per day of labor under two different hypothetical situations (Cases I and II).
Case I
Case II
South Dakota
North Dakota
South Dakota
North Dakota
Wheat (bushels)
4
1
3
1
Beer (bottles)
1
2
4
2
For case II, in what range must the “international” price of wheat fall? (i.e., if North and South
Dakota trade only with each other, what is the possible range of prices?)
A) Between 1 bushel of wheat = 4/3 bottles of beer and 1 bushel of wheat = 2 bottles of beer
B) Between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = 2 bottles of beer
C) Between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = ½ bottles of beer
D) none of the options
84) For case II, let the international price be 1 bottle = 1 bushel. Derive South Dakota’s “trading
possibilities curve.”
South Dakota
A
B
C
D
3
3
4
1
4
3
4
2
A) Option A
B) Option B
C) Option C
D) Option D
85) For case II, let the international price be 1 bottle = 1 bushel. Derive North Dakota’s “trading
possibilities curve.”
South Dakota
A
B
C
D
2
3
1
2
4
3
2
2
A) Option A
B) Option B
C) Option C
D) Option D
86) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
What is the price of beer without trade in Southern Ireland?
A) 2 bottles of whiskey = 3 kegs of beer
B) 5 bottles of whiskey = 12 kegs of beer
C) 1 bottle of whiskey = 1 kegs of beer
D) none of the options
87) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
What is the price of beer without trade in Northern Ireland?
A) 2 bottles of whiskey = 3 kegs of beer
B) 5 bottles of whiskey = 12 kegs of beer
C) 2 bottles of whiskey = 1 keg of beer
D) none of the options
88) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
In which product does Northern Ireland have a comparative advantage in producing?
A) Beer
B) Whiskey
C) Neither
D) Both
89) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
Suppose that trade occurs. Each country completely specializes and 500 kegs of beer are traded for
500 bottles of whiskey. What is the international price of beer?
A) 1 bottle of whiskey = 1 keg of beer
B) 3 bottles of whiskey = 1 keg of beer
C) 2/3 bottle of whiskey = 1 keg of beer
D) 1 bottle of whiskey = 3 kegs of beer
90) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
What is the cost of Northern Ireland producing one additional bottle of whiskey?
A) 0.33 kegs of beer
B) 0.66 kegs of beer
C) 1 kegs of beer
D) 3 kegs of beer
91) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
Is Northern Ireland better off when it trades with Southern Ireland?
92) The first two columns give the maximum daily amounts of beer and whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize in one or another
product. The last two columns give each country’s consumption without trade.
Maximum
beer
production
Maximum
whiskey
production
Beer consumption
without trade
Beer consumption
without trade
Northern
Ireland
500
kegs
1500
kegs
300
kegs
600
bottles
Southern
Ireland
1200
kegs
800
kegs
600
kegs
400
bottles
What is the increased number of goods available in Northern Ireland after trade?
A) 400 more bottles of whiskey and 200 more kegs of beer
B) 1,000 more bottles of whiskey and 500 more kegs of beer
C) 200 more bottles of whiskey and 400 more kegs of beer
D) 300 more bottles of whiskey and 300 more kegs of beer
93) Suppose that Northern Ireland and Southern Ireland each have 1,000 hours of labor per day.
Southern workers are paid €1 per day and Northern workers are paid £1 per day. What is the
approximate exchange rate associated with an international price of one keg of beer = 1 bottle of
whiskey?
A) €1.14 = £1
B) €0.80 = £1
C) €1 = £1
D) none of the options
94) Suppose that Northern Ireland and Southern Ireland each have 1,000 hours of labor per day.
Southern workers are paid €1 per day and Northern workers are paid £1 per day. What is the
approximate exchange rate associated with an international price of one keg of beer = 1 bottle of
whiskey?
Now suppose that Southern workers receive a raise to €2 per day. Will trade be possible at the
exchange rate you found?
95) Suppose that Northern Ireland and Southern Ireland each have 1,000 hours of labor per day.
Southern workers are paid €1 per day and Northern workers are paid £1 per day. What is the
approximate exchange rate associated with an international price of one keg of beer = 1 bottle of
whiskey?
Now suppose that Southern workers are paid €1 per day but the Northern workers receive a raise to
£2 per day. Will trade be possible at the exchange rate you found?
96) Consider a dentist and a 14-year old boy. The dentist can make $100 per hour drilling teeth and
the 14-year old boy can make $2 per hour picking up used aluminum cans. The dentist is a manly
man and can mow his half-acre lot in one hour. The 14-year old boy can mow the lawn in two
hours. If the dentist hires the boy to mow his lawn at any price less than $100, but more than $4
A) both he and the boy are better off.
B) the dentist would be exploiting the boy.
C) the boy would be exploiting the dentist.
D) all of the options
97) Consider the no-trade input/output situation presented in the following table and graph for
South and North Carolina. Assume that free trade is legal.
Input/Output without Trade
Country
South Carolina
North Carolina
Total
I. Total Potential Output
(lbs. or yards; 000,000s)
Guns
500
250
750
Butter
1,000
750
1,750
II. Consumption
(lbs. or yards; 000,000s)
Guns
250
200
450
Butter
500
150
650
Which state is better at making guns?
A) South Carolina
B) North Carolina
C) The states are equally good at making guns.
98) Consider the no-trade input/output situation presented in the following table and graph for
South and North Carolina. Assume that free trade is legal.
Input/Output without Trade
Country
South Carolina
North Carolina
Total
I. Total Potential Output
(lbs. or yards; 000,000s)
Guns
500
250
750
Butter
1,000
750
1,750
II. Consumption
(lbs. or yards; 000,000s)
Guns
250
200
450
Butter
500
150
650
How much does it cost for North Carolina to produce one gun?
A) 3 pounds of butter
B) .33 pounds of butter
C) 1.33 pounds of butter
D) none of the options
99) Consider the no-trade input/output situation presented in the following table and graph for
South and North Carolina. Assume that free trade is legal.
Input/Output without Trade
Country
South Carolina
North Carolina
Total
I. Total Potential Output
(lbs. or yards; 000,000s)
Guns
500
250
750
Butter
1,000
750
1,750
II. Consumption
(lbs. or yards; 000,000s)
Guns
250
200
450
Butter
500
150
650
What is the relative price of a gun in terms of butter in South Carolina?
A) 1 gun costs 3 pounds of butter.
B) 3 guns cost 1 pounds of butter.
C) 1 gun costs 2 pounds of butter.
D) 2 guns cost 1 pounds of butter.
100) Consider the no-trade input/output situation presented in the following table and graph for
South and North Carolina. Assume that free trade is legal.
Input/Output without Trade
Country
South Carolina
North Carolina
Total
I. Total Potential Output
(lbs. or yards; 000,000s)
Guns
500
250
750
Butter
1,000
750
1,750
II. Consumption
(lbs. or yards; 000,000s)
Guns
250
200
450
Butter
500
150
650
What is the relative price of a pound of butter in terms of guns in North Carolina?
A) 1 pound of butter costs 0.33 guns.
B) 1 gun costs 0.33 pounds of butter.
C) 1 pound of butter costs 0.66 guns.
D) 2 guns costs 0.66 pounds of butter.