International Economics 3rd Edition By Robert C. Feenstra – Test Bank

 

 

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Sample Test

Chapter 3- Gains and Losses from Trade in the Specific-Factors Model

1.	Bolivia’s government attempted to solve some of its problems with inequality of outcomes due to foreign investment in its natural gas resources by:
	A)	taxing international firms.
	B)	insisting that the firms pay higher wages to workers in the industry.
	C)	shutting down the firms in the wake of protests.
	D)	nationalizing the firms by reclaiming 51% ownership and raising taxes on foreign profits.
	Ans:  D     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Fact-Based     Topic:  Introduction

 

 

2.	The argument that trade generates gains for all workers may NOT be true because:
	A)	a more realistic assumption includes capital and land as factors of production and recognizes that trade will generate gains for some factors and losses for others.
	B)	greedy corporations exploit workers.
	C)	technology gains are concentrated among low-skill workers.
	D)	some workers lack skills and training and cannot find jobs.
	Ans:  A     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

3.	Under free trade and comparative advantage, the home country:
	A)	will see only benefits for its resources.
	B)	will see only losses for its resources.
	C)	will see winners and losers within its economy.
	D)	will be convinced that trade is not beneficial.
	Ans:  C     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

4.	In the two-sector (manufacturing and agriculture) specific-factors model, which resource(s) is (are) transferable between sectors?
	A)	land
	B)	labor
	C)	capital
	D)	labor and capital
	Ans:  B     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

5.	In contrast to the Ricardian model, international trade in the specific-factors model:
	A)	will lead to gains for all resources.
	B)	will lead to losses for all resources
	C)	will lead to gains for some resources and losses for other resources.
	D)	will not cause changes in the returns of any resources.
	Ans:  C     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Critical Thinking     Topic:  Introduction

 

 

6.	The specific-factors model is termed a “short-run” model because:
	A)	labor cannot move from one activity to another.
	B)	land resources can move from one activity to another.
	C)	labor can move from one activity to another.
	D)	land and capital cannot move from one activity to another.
	Ans:  D     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

7.	The model used to study the earnings of resources of production is called:
	A)	comparative advantage theory.
	B)	absolute advantage theory.
	C)	specific-factors model.
	D)	production possibility frontier.
	Ans:  C     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

8.	A “specific” factor of production is:
	A)	critical to the production of the good or service.
	B)	not transferable to other types of production and can only be used for the product in question.
	C)	a set quantity for each unit produced.
	D)	the opposite of a general factor, meaning it must fit within certain narrow quality parameters.
	Ans:  B     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Definitional     Topic:  Introduction

 

 

9.	In a two-sector (manufacturing and agriculture) specific-factors model:
	A)	land, labor, and capital are transferable between sectors.
	B)	labor is transferable between sectors.
	C)	land is transferable between sectors.
	D)	capital is transferable between sectors.
	Ans:  B     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

10.	In a two-sector (manufacturing and agriculture) specific-factors model:
	A)	land is specific to the manufacturing sector.
	B)	labor is specific to the manufacturing sector.
	C)	capital is specific to the manufacturing sector.
	D)	labor and capital are specific to the manufacturing sector.
	Ans:  C     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

11.	What resource is specific to the agriculture sector?
	A)	labor
	B)	land
	C)	capital
	D)	entrepreneurs
	Ans:  B     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Definitional     Topic:  Introduction

 

 

12.	What does the specific-factors model allow us to analyze?
	A)	the returns to factors of production
	B)	the allocation of resources between sectors
	C)	the returns to factors of production and the allocation of resources between sectors
	D)	the allocation of resources to the service sector
	Ans:  C     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

13.	In the specific-factors model, it is assumed that labor:
	A)	can move freely between the manufacturing and agricultural sectors.
	B)	can move from the manufacturing to the agriculture sector, but not from the agricultural to the manufacturing sector.
	C)	cannot move from one sector to the other.
	D)	cannot move within a sector.
	Ans:  A     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

14.	Because of the “law of diminishing marginal returns” to a factor, as more labor is employed, its marginal product:
	A)	rises.
	B)	falls.
	C)	stays constant.
	D)	rises disproportionally.
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

15.	When there are diminishing marginal returns to factors of production, the PPF is:
	A)	a negatively sloped straight line.
	B)	bowed out from the origin.
	C)	caved in toward the origin.
	D)	a positively sloped straight line.
	Ans:  B     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

16.	The two-sector (manufacturing and agriculture) specific-factors model assumes:
	A)	that there are increasing returns to labor.
	B)	that there are diminishing returns to labor.
	C)	that there are diminishing returns to capital in the agricultural sector.
	D)	that there are diminishing returns to land in the manufacturing sector.
	Ans:  B     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

17.	Diminishing returns to labor means:
	A)	that the marginal product of labor declines as the amount of labor used in a sector increases.
	B)	that the marginal product of labor declines as the amount of capital combined with labor in a sector increases.
	C)	that the marginal product of labor declines as the amount of land combined with labor in a sector increases.
	D)	that the marginal product of capital declines as the amount of labor used in a sector increases.
	Ans:  A     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

18.	In the two-sector (manufacturing and agriculture) specific-factors model, diminishing returns to labor implies:
	A)	that the country’s production possibilities frontier is linear (a straight line).
	B)	that the country’s production possibilities frontier is concave to the origin (bowed out from the origin).
	C)	that the country’s production possibilities frontier is convex from the origin (bowed in toward the origin).
	D)	that the country’s production possibilities frontier may be either concave to or convex from the origin.
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

19.	In the specific-factors model, as more labor is added to a sector, we will see:
	A)	the total product of labor decrease.
	B)	the marginal product of labor increase.
	C)	the average product of labor stay constant.
	D)	the marginal product of labor decrease.
	Ans:  D     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

20.	If we assume only one factor (labor), we can demonstrate on the PPF the opportunity cost of producing less of one good and more of the other good by:
	A)	taking the sum of the marginal products of labor for the two goods.
	B)	taking the difference of the marginal products of labor for the two goods.
	C)	taking the ratio of the marginal products of labor for the two goods times –1.
	D)	taking the average of the marginal products of labor for the two goods.
	Ans:  C     Difficulty:  Difficult     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

21.	When there are diminishing returns to labor, the production possibility frontier is _______ sloping and ________ to the origin.
	A)	downward; convex
	B)	downward; concave
	C)	upward; concave
	D)	upward; convex
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

22.	In an economy in which labor is mobile and homogeneous, the wages between industries:
	A)	will be equal.
	B)	will be very unequal.
	C)	will be less in the export industry.
	D)	will be unequal because in some firms the management is more fair to its workers.
	Ans:  A     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

23.	Consider the following information for a hypothetical economy: If the price per bicycle is $20 and the wage per worker is $40, then what is the marginal product of labor?
	A)	20 bicycles
	B)	2 bicycles
	C)	0.5 bicycle
	D)	1 bicycle
	Ans:  B     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

24.	Suppose that the wage is $20 per hour in a two-sector (manufacturing and agriculture) specific-factors model. Currently, the prices of manufactured and agricultural outputs are $5 and $1, respectively; the marginal product of labor in the manufactured sector is 6 units per hour; and the marginal product of labor in the agricultural sector is 10 units per hour. What will happen to the distribution of labor between the two sectors?
	A)	Nothing will happen. The current allocation of labor between the two sectors is ideal.
	B)	The manufacturing sector will demand more labor, and the agricultural sector will demand less labor at the current wage.
	C)	The agricultural sector will demand more labor, and the manufacturing sector will demand less labor at the current wage.
	D)	Both the agricultural and the manufacturing sector will demand more labor at the current wage.
	Ans:  B     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

25.	Suppose that wages in the agricultural and manufacturing sectors are $10 and $20 per hour, respectively, and that the prices of both the agricultural and manufactured good are both $50 per unit. What is the marginal productivity of labor in the manufacturing sector?
	A)	$1,000
	B)	0.4 units per hour
	C)	2.5 units per hour
	D)	$0.40
	Ans:  B     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

26.	If the price per bushel of wheat is $3 and the marginal product of labor is 4 bushels per hour, then what is the hourly wage?
	A)	$0.75
	B)	$1.33
	C)	$12
	D)	4 bushels
	Ans:  C     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

27.	A microeconomic analysis shows that in a competitive economy in which labor is homogenous and mobile, the ratio of the prices of the products in equilibrium is inversely proportional to:
	A)	the ratio of the capital used in production.
	B)	the ratio of the marginal products of labor.
	C)	the geographical region of the country in which the factory is located.
	D)	the strength of bargaining power of the workers.
	Ans:  B     Difficulty:  Difficult     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

28.	In equilibrium, with diminishing marginal products, the slope of the PPF is equal to:
	A)	the ratio of prices for the products.
	B)	the slope of the highest possible indifference curve.
	C)	the ratio of the marginal products of labor.
	D)	the ratio of prices for the products, the slope of the highest possible indifference curve, and the ratio of the marginal products of labor.
	Ans:  D     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

29.	In the two-sector (manufacturing and agriculture) specific-factors model, the slope of the production possibilities curve equals:
	A)	the ratio of marginal products of capital in the two sectors.
	B)	the ratio of marginal products of labor utilized in the two sectors.
	C)	the ratio of outputs produced in the two sectors.
	D)	the ratio of land and capital utilized in the two sectors.
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

30.	If a nation begins to trade, it will be able to sell (export) the product for which its own relative price is:
	A)	lower than other nations.
	B)	higher than other nations.
	C)	the same as other nations.
	D)	less than 10% of the value of other nations.
	Ans:  A     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  Overall Gains from Trade

 

 

31.	If a nation begins to trade, it will wish to buy (import) the product for which its own relative price is:
	A)	lower than other nations.
	B)	higher than other nations.
	C)	the same as other nations.
	D)	less than 10% of the value of other nations.
	Ans:  B     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  Overall Gains from Trade

 

 

32.	Suppose that a country has a comparative advantage in agricultural products. When trade occurs, the nominal and real prices of the agricultural good will:
	A)	both fall.
	B)	both rise.
	C)	both remain constant.
	D)	The nominal price will fall and the real price will rise.
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

33.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufacturing output. What will happen to the relative price of manufactured output when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first rise, then fall.
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

Use the following to answer questions 34-36:

 

Table: Home and Foreign Prices for Manufacturing and Agriculture

 

Home Country		Foreign Country
Pm	$5	Pm*	$7
Pa	$3	Pa*	$3

 

 

 

34.	(Table: Home and Foreign Prices for Manufacturing and Agriculture) Consider the information provided about the price of agriculture and manufacturing goods in two countries (Home and Foreign). Under the condition of no trade, what is the relative price of manufacturing goods?
	A)	1.66 of the agricultural good in the Home country
	B)	0.40 of the agricultural good in the Foreign country
	C)	0.60 of the agricultural good in the Home country
	D)	0.40 of the agricultural good in the Foreign country and 0.60 of the agricultural good in the Home country
	Ans:  A     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

35.	(Table: Home and Foreign Prices for Manufacturing and Agriculture) Consider the information provided about the price of agriculture and manufacturing goods in two countries (Home and Foreign). If the two countries open their markets for trade, then:
	A)	Home has the comparative advantage in agriculture.
	B)	Home has the comparative advantage in manufacturing.
	C)	Foreign has absolute advantage in both goods.
	D)	Foreign has a comparative advantage in manufacturing.
	Ans:  B     Difficulty:  Difficult     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

36.	(Table: Home and Foreign Prices for Manufacturing and Agriculture) Consider the information provided about the price of agriculture and manufacturing goods in two countries (Home and Foreign). Under free trade conditions, Foreign will export ________ goods and Home will export ___________ goods.
	A)	manufacturing; agriculture
	B)	manufacturing; manufacturing
	C)	agriculture; manufacturing
	D)	Not enough information is given to answer the question.
	Ans:  C     Difficulty:  Difficult     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

37.	As a nation begins to export, its own relative price of exported goods will ______, and as it imports other goods, the relative price of those will ______ , thus ___________ its standard of living.
	A)	fall; rise; lowering
	B)	rise; fall; lowering
	C)	rise; fall; raising
	D)	fall; rise; raising
	Ans:  C     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

38.	When a nation engages in no trade and produces everything it consumes, we call it:
	A)	anarchy.
	B)	oligarchy.
	C)	autarky.
	D)	embargo.
	Ans:  C     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Definitional     Topic:  Overall Gains from Trade

 

 

39.	If a nation prohibits trade with one or more trading partner nations, it is called:
	A)	anarchy.
	B)	oligarchy.
	C)	autarky.
	D)	embargo.
	Ans:  D     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Definitional     Topic:  Overall Gains from Trade

 

 

40.	Earlier in our study we learned that when a country is opened to free trade:
	A)	relative prices of the traded products do not change.
	B)	absolute prices measured in the domestic currency do not change.
	C)	the relative price rises in the export sector and falls in the import sector.
	D)	the export sector experiences a decline in demand.
	Ans:  C     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  Overall Gains from Trade

 

 

41.	As a nation opens trade, the relative prices of products it exports will __________ and the relative prices of products it imports will ___________.
	A)	rise; fall
	B)	fall; rise
	C)	remain constant; fall
	D)	rise; remain constant
	Ans:  A     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Concept-Based     Topic:  Overall Gains from Trade

 

 

42.	As a nation increases its production of exports, demand for all factors of production used in those firms:
	A)	will rise.
	B)	will fall.
	C)	will remain the same.
	D)	will decrease but only slightly.
	Ans:  A     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

43.	As a nation increases its production of exports, demand for specific or fixed factors (such as capital and land) used in the exporting sector:
	A)	will rise.
	B)	will fall.
	C)	will remain the same.
	D)	will decrease but only slightly.
	Ans:  A     Difficulty:  Moderate     Section:  Specific-Factors Model     Skill Descriptor:  Analytical Thinking     Topic:  Overall Gains from Trade

 

 

44.	The absence of trade is known as:
	A)	alitartky.
	B)	oligarchy.
	C)	autarky.
	D)	embargo.
	Ans:  C     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Definitional     Topic:  Overall Gains from Trade

 

 

45.	From 1807 to 1809, a trade embargo imposed by the United States resulted in:
	A)	a rise in real GDP, as residents turned toward domestic production.
	B)	a fall in real GDP of about 5%.
	C)	a lower unemployment rate in the United States.
	D)	a rise in the U.S. standard of living from lower prices as a result of lowered demand.
	Ans:  B     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Fact-Based     Topic:  How Large Are the Gains from Trade?

 

 

46.	Many examples in this chapter indicate that there are substantial ________________ as a result of competition and trade.
	A)	environmental disasters
	B)	labor shortages and strikes
	C)	gains to the economy
	D)	losses to consumers and workers
	Ans:  C     Difficulty:  Easy     Section:  Specific-Factors Model     Skill Descriptor:  Critical Thinking     Topic:  How Large Are the Gains from Trade?

 

 

47.	In a competitive market, what happens to the equilibrium wage?
	A)	It is the same in all industries.
	B)	It is equal to the price of the product times the marginal product of the labor used in its production.
	C)	It is determined by the intersection of curves representing the price times a rising marginal product as less labor is used in one industry and the price times a falling marginal product as more labor is used in the other.
	D)	All of these happen to the equilibrium wage.
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Determination of Wages

 

 

48.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in agricultural output. Will workers be better or worse off following the opening of trade with other countries?
	A)	Workers will be better off because the nominal wage increases.
	B)	Workers will be worse off because the nominal wage decreases.
	C)	Workers may be better off or worse off because the real wage in terms of the agricultural good rises and the real wage in terms of the manufactured good falls.
	D)	Workers may be better off or worse off because the real wage in terms of the agricultural good falls and the real wage in terms of the manufactured good rises.
	Ans:  D     Difficulty:  Difficult     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Determination of Wages

 

 

49.	If the wage rate in the agriculture sector is lower than the manufacturing sector, then labor will migrate to the manufacturing sector. This will cause:
	A)	both wage and marginal product of labor in the manufacturing sector to decrease.
	B)	both wage and marginal product of labor in the agriculture sector to decrease.
	C)	the nation to import more goods.
	D)	There will be no effect on either sector.
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Determination of Wages

 

 

50.	The term real wages refers to:
	A)	a worker’s hourly wage in dollars.
	B)	the purchasing power of a worker’s wage.
	C)	the productivity of a worker’s labor.
	D)	the productivity of a worker’s capital.
	Ans:  B     Difficulty:  Easy     Section:  Earnings of Labor     Skill Descriptor:  Definitional     Topic:  Change in Relative Price of Manufactures

 

 

51.	A change in the relative price of one good versus another will cause a change in marginal product and the allocation of labor resources. When the price of good A increases relative to the price of good B and labor is mobile, the equilibrium real wage in industry A will:
	A)	rise in terms of good B.
	B)	fall in terms of good B.
	C)	remain the same.
	D)	rise in terms of good A.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Topic:  Change in Relative Price of Manufactures Skill  Descriptor:  Analytical Thinking

 

 

52.	As relative prices in various industries change due to trade, the marginal product of the mobile resources used in the expanding industry __________, and the marginal product of the mobile resources used in the contracting industry __________.
	A)	rises; falls
	B)	falls; rises
	C)	remains the same; remains the same
	D)	changes by exactly the same percentage; changes by exactly the same percentage
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

53.	As relative prices in various industries change due to trade, the marginal product of fixed resources used in the expanding industry __________, and the marginal product of fixed resources used in the contracting industry __________.
	A)	rises; falls
	B)	remains the same; remains the same
	C)	changes by exactly the same percentage; changes by exactly the same percentage
	D)	falls; rises
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

54.	If the relative price of one product rises and labor is mobile, then:
	A)	the percentage increase in the equilibrium real wage will be exactly the same as the percentage increase in the relative price.
	B)	the percentage increase in the equilibrium real wage will be lower than the percentage increase in the relative price.
	C)	the percentage increase in the equilibrium real wage will be higher than the percentage increase in the relative price.
	D)	the equilibrium real wage will not change.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

55.	In the specific-factors model, an increase in the price of the manufactured good will cause:
	A)	an increase in the wage in the manufacturing sector.
	B)	capital to move from the agricultural to the manufacturing sector.
	C)	land to move from the manufacturing to the agricultural sector.
	D)	a decrease in the wage in the agricultural sector.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

56.	An increase in demand for resources fixed or specific to an industry will cause their earnings _____ because those resources cannot be released from other industries.
	A)	to fall
	B)	to rise by the same rate as for all resources
	C)	to rise disproportionally
	D)	to fall disproportionally
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

57.	When the demand for products competing with imports falls, demand for the specific factors used in their production falls and:
	A)	the relative prices (earnings) of these specific factors will fall disproportionally.
	B)	the relative prices (earnings) of these specific factors will rise disproportionally.
	C)	the relative prices (earnings) of these specific factors will fall by the same rate as for all resources.
	D)	the employment of these specific factors will rise disproportionally.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

58.	In the specific-factors model, suppose that a country has a comparative advantage in manufacturing output. Will workers be better or worse off following the opening of trade with other countries?
	A)	Workers will be better off because the nominal wage increases.
	B)	Workers will be better off because both nominal and real wages increase.
	C)	Workers may be better off or worse off because the real wage in terms of the agricultural good rises and the real wage in terms of the manufactured good falls.
	D)	Workers may be better off or worse off because the real wage in terms of the agricultural good falls and the real wage in terms of the manufactured good rises.
	Ans:  C     Difficulty:  Difficult     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

59.	In the specific-factors model, an increase in the price of the manufactured good will cause:
	A)	a decrease in nominal wages in both the agricultural and manufacturing sectors.
	B)	an increase in real wages in both the agricultural and manufacturing sectors.
	C)	an increase in both nominal and real wages in both the agricultural and manufacturing sectors.
	D)	an increase in nominal wages in both the agricultural and manufacturing sectors.
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

60.	In the specific-factors model, an increase in the price of the agricultural good will cause:
	A)	a decrease in nominal wages in both the agricultural and manufacturing sectors.
	B)	an increase in nominal wages in both the agricultural and manufacturing sectors.
	C)	an increase in both nominal and real wages in both the agricultural and manufacturing sectors.
	D)	an increase in the nominal wage in the agricultural sector and a decrease in nominal wage in the manufacturing sector.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

Use the following to answer questions 61-64:

 

Table: Production and Prices in Two Industries

 

Marginal Product of Labor in Agriculture (MPLa)	Marginal Product of Labor in Manufacturing (MPLm)	Price of Agriculture Good (Pa)	Price of Manufacturing Good (Pm)
5	3	$10	$10

 

 

 

61.	(Table: Production and Prices in Two Industries) According to the information provided in the table, the wage rate in the agriculture sector is:
	A)	$50.
	B)	$15.
	C)	$30.
	D)	$10.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

62.	(Table: Production and Prices in Two Industries) According to the information provided in the table, the wage rate in the manufacturing sector is:
	A)	$50.
	B)	$10.
	C)	$100.
	D)	$30.
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

63.	(Table: Production and Prices in Two Industries) Using the information from the table, we can expect which of the following to happen in the economy?
	A)	Labor will migrate from the agriculture to the manufacturing sector.
	B)	Labor will migrate from the manufacturing to the agriculture sector.
	C)	The marginal product of labor in the agriculture sector will increase.
	D)	The marginal product of labor in the manufacturing sector will decrease.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

64.	(Table: Production and Prices in Two Industries) According to the information provided in the table, if the price of the agriculture good decreases to $5, then:
	A)	wages in the manufacturing sector will be $25.
	B)	the wage rate in the agriculture sector will be $25.
	C)	the marginal product of both sectors will decline.
	D)	More agriculture goods should be imported.
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

65.	If we consider the specific-factors model, the effect of an increase in exports on the real wages of workers:
	A)	is inconclusive because some goods’ prices will be higher compared with the wage, and some will be lower.
	B)	absolutely increases the buying power of the real wage.
	C)	absolutely decreases the buying power of the real wage.
	D)	will encourage foreign workers to emigrate to the United States.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Analytical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

66.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. Will workers be better or worse off following the opening of trade with other countries?
	A)	Workers will be better off because the nominal wage increases.
	B)	Workers will be worse off because the nominal wage decreases.
	C)	Workers may be better off or worse off because the real wage in terms of the agricultural good rises and the real wage in terms of the manufactured good falls.
	D)	Workers may be better off or worse off because the real wage in terms of the agricultural good falls and the real wage in terms of the manufactured good rises.
	Ans:  C     Difficulty:  Difficult     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

67.	If trade causes shifts in production so that some workers are laid off, most economists conclude:
	A)	that the nation should extend unemployment benefits for a longer period.
	B)	that the situation is usually temporary because there are jobs created in export industries.
	C)	that we should expect wages to fall and therefore should not allow imports to take U.S. jobs.
	D)	that all workers will be better off because overall the equilibrium wage will rise.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

68.	Suppose that labor is mobile between sectors but that capital and land are specific. Then labor will tend to benefit from trade when:
	A)	it spends a large amount of its income on the imported good.
	B)	it spends a large amount of its income on the exported good.
	C)	wages do not change much in percentage terms.
	D)	all of these occur.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

69.	Economists believe that layoffs and wage declines due to increased imports:
	A)	are the most critical problem facing the economy today.
	B)	may be caused by factors such as changing technology and changing demands for workers rather than by increased imports.
	C)	should be addressed by the WTO, which usually ignores such issues.
	D)	are so minor that we may safely ignore them.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

70.	If trade causes some workers to be laid off, most economists conclude:
	A)	that all other workers will be better off because their wages will rise.
	B)	that we should not allow imports to take U.S. jobs.
	C)	that we should expect wages to fall.
	D)	that none of these answers is true.
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Change in Relative Price of Manufactures

 

 

71.	In an industrialized country, the amount of labor employed in the agriculture sector is:
	A)	larger than labor employed in the manufacturing sector.
	B)	larger than labor employed in the service sector.
	C)	lower than labor employed in either the manufacturing and service sector.
	D)	is about the same as labor employed in the service sector.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Manufacturing and Services in the United States: Employment and Wages Across Sectors

 

 

72.	Which of the following is NOT a possible explanation for wage differences across sectors?
	A)	Demand for products affects demand for resources.
	B)	Changes in technology affect demand for resources.
	C)	The government mandates that service sector jobs pay more.
	D)	Import competition in a sector leads to lower wages.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Critical Thinking     Topic:  Manufacturing and Services in the United States: Employment and Wages Across Sectors

 

 

73.	Which of the following BEST describes changes in U.S. manufacturing employment between 1973 and 2011?
	A)	Manufacturing employment fell, but manufacturing employment as a share of total U.S. employment rose.
	B)	Manufacturing employment rose, but manufacturing employment as a share of total U.S. employment fell.
	C)	Both manufacturing employment and manufacturing employment as a share of total U.S. employment fell.
	D)	Both manufacturing employment and manufacturing employment as a share of total U.S. employment rose.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Manufacturing and Services in the United States: Employment and Wages Across Sectors

 

 

74.	Workers displaced because of trade:
	A)	have had larger losses in manufacturing compared with services.
	B)	have had larger losses among older workers than younger workers.
	C)	are likely to find replacement jobs within 3 years.
	D)	have experienced all of these answer choices.
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

75.	According to the Bureau of Labor Statistics, the people losing jobs in the manufacturing sector between 2009 and 2011, were:
	A)	more likely to find higher paying jobs than service sector workers.
	B)	less likely to find higher paying jobs than service sector workers.
	C)	more likely to work in a foreign country.
	D)	less likely to find a lower paying job than those in the service sector.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

76.	The Trade Adjustment Assistance program is:
	A)	an unemployment insurance program regardless of the reason for job loss.
	B)	an unemployment insurance program that pays for job loss due to import competition.
	C)	a subsidy program for the producers.
	D)	a tax on importers of foreign goods.
	Ans:  B     Difficulty:  Easy     Section:  Earnings of Labor     Skill Descriptor:  Definitional     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

77.	The United States maintains a program to help workers affected by trade relocation. This is called:
	A)	the North American Free Trade Alliance.
	B)	the Worker Retraining and Education Act.
	C)	Trade Adjustment Assistance.
	D)	Supplemental Security Income (SSI).
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Labor     Skill Descriptor:  Definitional     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

78.	Which federal government program provides additional benefits to workers who are laid off due to import competition?
	A)	Trade Unemployment Insurance
	B)	Import Unemployment Insurance
	C)	Trade Adjustment Assistance
	D)	Unemployment Insurance
	Ans:  C     Difficulty:  Easy     Section:  Earnings of Labor     Skill Descriptor:  Definitional     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

79.	In the United States, which workers displaced by trade are able to adjust the easiest?
	A)	those in the service industries
	B)	those in the manufacturing industries
	C)	Evidence indicates that there is no difference across industries.
	D)	There is no available evidence on this topic.
	Ans:  A     Difficulty:  Easy     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

80.	Trade Adjustment Assistance provides:
	A)	training to those employed in exporting industries.
	B)	training to those employed in importing industries.
	C)	extra income to those employed in importing industries.
	D)	extra income to those formerly employed in importing industries.
	Ans:  D     Difficulty:  Easy     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

81.	Under the 2009 jobs stimulus bill signed by President Obama, who can apply for aid after losing their job due to import competition?
	A)	service sector workers
	B)	Farmers
	C)	neither service sector workers nor farmers
	D)	both service sector workers and farmers
	Ans:  D     Difficulty:  Easy     Section:  Earnings of Labor     Skill Descriptor:  Fact-Based     Topic:  Trade Adjustment Assistance Programs: Financing the Adjustment Costs of Trade

 

 

82.	Some economists believe that an extended safety net for workers affected by trade:
	A)	would be extremely expensive and unnecessary.
	B)	would create a more favorable attitude toward trade by workers.
	C)	would create jealousy among those who lose jobs for other reasons.
	D)	Would lead to political maneuvering and corruption.
	Ans:  B     Difficulty:  Easy     Section:  Earnings of Capital and Land     Skill Descriptor:  Critical Thinking     Topic:  Earnings of Capital and Land

 

 

83.	In the specific-factors model, an increase in the price of manufactured goods will cause:
	A)	an increase in the real rental of capital.
	B)	a decrease in the real rental of capital.
	C)	no change in the real rental of capital.
	D)	a decrease in the nominal wage in the manufacturing sector.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

84.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufacturing output. What will happen to the amount of land used in producing agricultural output when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

85.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufacturing output. What will happen to the return (rental) on land when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

86.	The specific-factors model assumes that in each industry (such as manufacturing and agriculture) there are factors of production that are:
	A)	less productive.
	B)	outsourced to other nations.
	C)	fixed or immobile.
	D)	very scarce and therefore have a high supply price.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Concept-Based     Topic:  Determining the Payments to Capital and Land

 

 

87.	The specific-factors model concludes that if there is an increase in relative price (and an expansion) in one industry, the factor specific to that industry:
	A)	will experience an increase in its marginal product.
	B)	will experience a decrease in its marginal product.
	C)	will be transferred to other industries.
	D)	will have competition as additional units of that specific factor are hired from other industries.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

88.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufacturing output. What will happen to the return (rental) on capital when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

89.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in agricultural output. What will happen to the return (rental) on capital when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

90.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. What will happen to the marginal product of capital used in manufacturing production when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

91.	Suppose that the Home country in the two sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. What will happen to the amount of capital used in manufacturing production when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  C     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

92.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in agricultural output. What will happen to the return (rental) on land when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

93.	The specific-factors model concludes that if there is a decrease in relative price (and an expansion) in one industry, the factor specific to that industry:
	A)	will experience an increase in its marginal product.
	B)	will experience a decrease in its marginal product.
	C)	will be transferred to other industries.
	D)	will have competition as additional units of that specific factor are hired from other industries.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

94.	In the specific-factors model, suppose that a country has a comparative advantage in manufacturing output. Will landowners be better or worse off following the opening of trade with other countries?
	A)	They will be better off.
	B)	They will be worse off.
	C)	They may be better off or worse off because the real rental on capital in terms of the agricultural good rises and the real rental in terms of the manufactured good falls.
	D)	They may be better off or worse off because the real rental on capital in terms of the manufactured good rises and the real rental in terms of the agricultural good falls.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining Payments to Capital and Land

 

 

95.	As a general rule, the return to (or rental price of) a specific factor used in a product  tends to:
	A)	rise disproportionally when the product is exported.
	B)	fall disproportionally when the product is exported.
	C)	benefit its owners when there is a decrease in the relative price of the product.
	D)	rise disproportionally when the product is imported.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

96.	As a general rule, when there are specific factors, owners of factors specific to the importing industry are ______________, whereas owners of factors specific to export industries are ______________.
	A)	harmed; benefited
	B)	benefited; harmed
	C)	unemployed; hired
	D)	not affected; harmed
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

97.	As a general rule, when there are specific factors, owners of factors specific to the importing industry are ______________, whereas the mobile factor owners (such as labor) in that industry are ______________.
	A)	harmed; benefited
	B)	benefited; harmed
	C)	harmed; either benefited or harmed, depending on consumption patterns
	D)	not affected; harmed
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

98.	Why does the return to capital change after trade occurs?
	A)	There is more labor used per unit of capital in the manufacturing sector.
	B)	There is more capital used per unit of labor in the manufacturing sector.
	C)	There is more labor used per unit of land in the agricultural sector.
	D)	There is more land used per unit of labor in the agricultural sector.
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Concept-Based     Topic:  Determining the Payments to Capital and Land

 

 

99.	In the specific-factors model, suppose that the Home country has a comparative advantage in agricultural output. What will happen to the amount of capital used in manufacturing production when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

100.	In the specific-factors model, suppose that the Home country has a comparative advantage in agricultural output. What will happen to the amount of capital used in agricultural production when trade occurs?
	A)	It will fall.
	B)	It will rise.
	C)	It will not change.
	D)	It will first fall, then rise.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Determining the Payments to Capital and Land

 

 

Use the following to answer questions 101-103:

 

Table: An Economy Before and After Trade

The top part of the table gives manufacturing and agricultural prices, production, resource utilization, and resource payments in autarky (a no-trade situation). The bottom part of the table provides (some of) the same information after trade occurs.

 

	Manufacturing	Agriculture
No-Trade Situation
Price per unit	$10	$10
Output	100 units	100 units
Wage	$10/hour	$10/hour
Employment	50 hours	70 hours
Return to capital	$10/unit	0
Amount of capital	50 units	0
Return to land	NA	$5/acre
Amount of land	NA	60 acres
Trade Situation
Price per unit	$12	$10
Output	120 units	75 units
Wage	$12/hour	$12/hour
Employment	70 hours	50 hours
Return to capital	??/unit	NA
Amount of capital	50 units	NA
Return to land	NA	??/acre
Amount of land	NA	60 acres

 

 

 

101.	(Table: An Economy Before and After Trade) According to the table, what is the return to capital after trade occurs?
	A)	$10.00 per unit
	B)	$12.00 per unit
	C)	$17.60 per unit
	D)	$24.00 per unit
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

102.	(Table: An Economy Before and After Trade) What is the return to land after trade occurs?
	A)	$5.00 per acre
	B)	$2.50 per acre
	C)	$150.00 per acre
	D)	$22.00 per acre
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

103.	(Table: An Economy Before and After Trade) Why does the return to capital change after trade occurs?
	A)	There is more labor used per unit of capital in the manufacturing sector.
	B)	There is more capital used per unit of labor in the manufacturing sector.
	C)	There is more labor used per unit of land in the agricultural sector.
	D)	There is more land used per unit of labor in the agricultural sector.
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Concept-Based     Topic:  Numerical Example

 

 

Use the following to answer questions 104-106:

 

Table: Revenues and Costs for Two Industries

 

Manufacturing	Agriculture
Sales revenue = PM – QM = $100	Sales revenue = PA – QA = $100
Payments to labor = W – LM = $70	Payments to labor = W – LA = $60
Payments to capital = RK – K = $30	Payments to land = RT – T = $40

 

 

 

104.	(Table: Revenues and Costs for Two Industries) Suppose that the manufacturing industry and agriculture sector have the payments to labor and capital illustrated in the table. Suppose the price of manufacturing goods increases by 10% (PM), and the change in wages is given as 5%; then the rental rate on capital will:
	A)	decrease by 16%.
	B)	increase by 21.67%.
	C)	remain unchanged.
	D)	decrease by 21.67%.
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

105.	(Table: Revenues and Costs for Two Industries) Suppose that the manufacturing industry and agriculture sector have the payments to labor and capital illustrated in the table. Suppose the price of manufacturing goods increases by 10% (PM), and the change in wages is given as 5%; then the rental rate on land will:
	A)	increase by 7.5%.
	B)	decrease by 5%.
	C)	decrease by 7.5%.
	D)	not change.
	Ans:  C     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

106.	(Table: Revenues and Costs for Two Industries) Suppose that the manufacturing industry and agriculture sector have the payments to labor and capital illustrated in the table. Suppose the price of manufacturing goods increases by 10% (PM), and the change in wages is given as 5%. What would we expect to take place?
	A)	More output will be produced in the agriculture sector.
	B)	Labor will migrate to the agriculture sector.
	C)	More output will be produced in the manufacturing sector.
	D)	The rental rate on capital will decline.
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

107.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. What is the effect on the return of capital after trade occurs?
	A)	The return on capital increases.
	B)	The return on capital decreases.
	C)	The return on capital does not change.
	D)	The effect cannot be determined.
	Ans:  A     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

108.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. Which statement below best describes changes in returns on capital and land after trade occurs?
	A)	The return on capital and land will both rise.
	B)	The return on capital and land will both fall.
	C)	The return on capital will rise and the return on land will fall.
	D)	The return on capital will fall and the return on land will rise.
	Ans:  C     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

109.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. What is the effect on the return of land after trade occurs?
	A)	The return on land increases.
	B)	The return on land decreases.
	C)	The return on land does not change.
	D)	The effect cannot be determined.
	Ans:  B     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

110.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. After trade occurs, the return on capital will ____________  the price of the manufactured good.
	A)	increase faster than
	B)	increase slower than
	C)	increase at the same rate as
	D)	decrease faster than
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

111.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. Which specific factor will gain after trade occurs?
	A)	Capital
	B)	Land
	C)	both capital and land
	D)	Labor
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

112.	Which of the following statements about the specific-factors model is TRUE?
	A)	When exports of a product rise, the increase in export revenue is divided equally among mobile and specific factors of production..
	B)	When imports rise, revenues of firms that compete with imports fall. The decrease in revenue is divided equally among the mobile and specific factors of production..
	C)	When exports of a product rise, factors specific to exports gain less and mobile factors gain more; when imports rise, factors specific to firms competing with imports gain more and mobile factors gain less.
	D)	When exports of a product rise, factors specific to exports gain more than mobile factors; when imports rise, factors specific to import competing industries lose more than mobile factors.
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

113.	Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. Which specific factor will gain after trade occurs?
	A)	Capital
	B)	Land
	C)	both capital and land
	D)	Labor
	Ans:  A     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

Use the following to answer questions 114-119:

 

Table: Sales and Payments

 

·  Manufacturing sales revenue = $1,000

· Total wages paid to labor in manufacturing = $500

· Total wages paid to labor in agriculture = $500

· Total payments to land = $500

 

 

 

114.	(Table: Sales and Payments) What is the total payment to capital in the manufacturing sector?
	A)	$1,500
	B)	$1,000
	C)	$500
	D)	$0
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

115.	(Table: Sales and Payments) What is the total revenue (Price x Quantity) of the agricultural sector?
	A)	$400
	B)	$500
	C)	$600
	D)	$1,000
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

116.	(Table: Sales and Payments) Now suppose that the price of the manufactured good rises by 20% with no change in the price of the agricultural good. Wages in both sectors rise by 10%. Which of the following is the new value of the payment to capital?
	A)	$700
	B)	$650
	C)	$600
	D)	$500
	Ans:  B     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

117.	(Table: Sales and Payments) What is the new value of the rental on land with the same changes in the price of the manufactured good and wages as in the previous question?
	A)	$550
	B)	$500
	C)	$450
	D)	$400
	Ans:  C     Difficulty:  Difficult     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

118.	(Table: Sales and Payments) Which of the following is the correct ordering (from highest to lowest) of changes in the real wage, real rental on capital, and real rental on land in the previous set of questions?
	A)	real rental on land, real wage, real rental on capital
	B)	real wage, real rental on land, real rental on capital
	C)	real rental on capital, real rental on land, real wage
	D)	real rental on capital, real wage, real rental on land
	Ans:  D     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

119.	(Table: Sales and Payments) Suppose that the price of the agricultural good increases with no change in the price of the manufactured good. Which of the following  resources will show the MOST gain?
	A)	Capital
	B)	Labor
	C)	Land
	D)	capital and labor
	Ans:  C     Difficulty:  Moderate     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical Thinking     Topic:  Numerical Example

 

 

120.	Which specific factor loses from trade?
	A)	one that is specific to the importing industry
	B)	one that is specific to the exporting industry
	C)	one that is mobile between sectors
	D)	None of these loses from trade.
	Ans:  A     Difficulty:  Easy     Section:  Earnings of Capital and Land     Skill Descriptor:  Analytical thinking     Topic:  What It All Means