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Sample Test
CHAPTER 3
THE CLASSICAL WORLD OF DAVID RICARDO
AND COMPARATIVE ADVANTAGE
1. Essay
Questions
1. Why
did Ricardo think that international trade was based on comparative advantage
while internal (domestic) trade was based on absolute advantage?
Answer: For Ricardo as with Smith, idea of absolute advantage
determined the pattern of trade and production internal to a country because
factors were perfectly mobile. However, given the international immobility of
the factors of production, the pattern of trade was based on comparative
advantage.
.
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
2. Suppose
that the pre-trade price ratio is 2 grain: 5 hardware and that the
international terms of trade are 3 grain: 5 hardware. Which commodity
will the country in question export? Why? What will happen to
production in the country under the Classical assumptions? Why?
Answer: The country in question will export hardware, since it
can produce this good at a lower opportunity cost (lower autarkic relative
price) than the international TOT. Under classical assumptions, production will
be completely specialized in hardware.
Difficulty: 03 Hard
Topic: Ricardian Comparative Advantage
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 03-02
3. Did
the concept of comparative advantage strengthen or worsen the case against
Mercantilist trade doctrine? Why?
Answer: It destroyed the Mercantilist trade doctrine, primarily
by showing that trade was mutually beneficial, and that the benefit was greater
consumption of goods and services rather than the accumulation of a
precious metal.
Difficulty: 03 Hard
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Apply
Learning Objective: 03-02
4. Is it
possible for trade to take place in the Classical world of David Ricardo
without complete specialization of production in both countries? If so,
when? Who will receive the gains from trade in this instance? Why?
Answer: Ricardo showed that both countries gained from trade
even when neither altered its production bundle. In this instance, Ricardo
showed that each country gained some quantity of labor hours, i.e., each was
able to consume a commodity bundle that required a quantity of labor hours in
excess of the amount that each country actually possessed.
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with Production-Possibilities
Frontiers
AACSB: Analytical Thinking
Blooms: Understand
Learning Objective: 03-03
5. It is
often said that international trade involves both absolute and comparative
advantage. Can this be so? Why or why not?
Answer: International trade is based upon comparative advantage.
However, it also involves absolute advantage in the sense that a country’s
comparative advantage in a good means either that it has an absolute advantage
in the good or, if not, it is least absolutely disadvantaged in the good.
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
6. Set
up a Ricardo-type comparative advantage numerical example with two countries
and two goods. Distinguish “absolute advantage” from “comparative advantage” in
the context of your example. Then select an international terms-or-trade
ratio and explain in some detail how trade between the two countries benefits
each of them in comparison with autarky. When would either of your
countries NOT benefit
from engaging in trade? Explain.
Answer: In a Ricardo-type example, only one country benefits if
the international terms-or-trade ratio is equal to the other country’s pretrade
price ratio.
Difficulty: 03 Hard
Topic: Ricardian Comparative Advantage
AACSB: Analytical Thinking
Blooms: Create
Learning Objective: 03-02
1. Multiple-Choice
Questions
7. In
the following Classical-type table showing the output per 10-days of labor input in each of
the two commodities in each of the two countries,
Cameras
Wine
France
100
units
40 units
Germany 150
units
50 units
1. Germany
has a comparative advantage in both goods.
2. France
has an absolute advantage in both goods.
3. France
has a comparative advantage in cameras.
4.
the pretrade price ratio in France is 1 wine = 2.5 cameras.
Answer: d
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
8. Given
the following Ricardo-type table shows the labor input required per
unit of output
in each of the two industries in each of the two countries:
Shirts Brandy
United
States
4 days
12 days
France
6 days 12
days
Which one of the following statements is correct?
1.
France’s pretrade price ratio is 1 brandy = 2 shirts.
2. The
U.S. pretrade price ratio is 1 shirt = 3 brandy.
3. The
United States has an absolute advantage in both goods.
4. France
will export shirts after trade begins.
Answer: a
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
9. In
the situation in Question #8 above, if the countries engage in trade at
posttrade prices
(terms of trade) of 1 shirt = 0.5 brandy, then
1. France
gets all the gains from trade.
2.
the United States gets all the gains from trade.
3. neither
country gains from trade.
4. the
two countries share equally in the gains from trade.
Answer: b
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
10.
The assumption of constant costs of production in the Classical
model results in a __________ production possibilities frontier, and, in
the case of a “small” country, __________
specialization in production when trade takes place.
1. linear;
incomplete
2. concave-to-the-origin;
complete
3. convex-to-the-origin;
incomplete
4.
linear; complete
Answer: d
Difficulty: 01 Easy
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-03
11.
Suppose that, in a Classical constant-opportunity-costs
framework, country I can produce 15 units of wheat if it devotes all of its
resources to wheat production and 45 units of clothing if it devotes all of its
resources to clothing production. In a trading situation for this country, if
the world price ratio is Pwheat/Pclothing =
⅓ (or Pclothing/Pwheat =
3), country I would
1. export
wheat and import clothing.
2. export
clothing and import wheat.
3. be
indifferent to trade.
4. export
either clothing or wheat and import either wheat or clothing – cannot be
determined without more information.
Answer: b
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
12.
Which one of the following is NOT an
assumption contained in the Classical/Ricardo trade model?
1. Factors
of production (labor) are completely mobile within a country.
2.
Factors of production (labor) are completely mobile between countries.
3. Marginal
costs are constant as production increases for a firm/industry.
4. Transportation
costs of goods between countries are zero.
Answer: b
Difficulty: 01 Easy
Topic: Assumptions of the Basic Ricardian Model
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-01
13.
Given the following Ricardo-type table shows the labor input required per
unit of output in
each of the two industries in each of the two countries:
Steel Cloth
United Kingdom
4 days
8 days
Germany
6 days
9 days
Which one of the following statements is true?
1. The
United Kingdom has an absolute advantage in both goods and a comparative
advantage in cloth.
1. The
pretrade price ratio in the United Kingdom is 1 steel:2 cloth.
2. The
United Kingdom has an absolute advantage in neither good but a comparative
advantage in steel.
1.
The pretrade price ratio in Germany is 1 cloth:1.5 steel.
Answer: d
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
14.
Given the information in Question #13 above, suppose that
Germany is a much larger
country in terms of production and income than is the United
Kingdom. In this situation,
other things equal, when the countries engage in trade, the
posttrade price ratio (terms of
trade) would tend to settle __________, and __________ would
therefore tend to have
relatively large gains from trade.
1. toward
a value of 1 cloth:2 steel; the United Kingdom
2. toward
a value of 1 cloth:2 steel; Germany
3.
toward a value of 1 cloth:1.5 steel; the United Kingdom
4. toward
a value of 1 cloth:1.5 steel; Germany
Answer: c
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
15.
If a country’s relative price of X (compared to Y) in autarky is
greater than the same relative prices on the world market, then the country has
a comparative advantage in good __________, and it will __________.
1. X;
export Y and import X
2. X;
export X and import Y
3.
Y; export Y and import X
4. Y;
export X and import Y
Answer: c
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
16.
In the Classical (Ricardo) analysis,
1. if a
country has an absolute advantage in a good, it also has a comparative
advantage
in the good.
1. if a
country has a comparative advantage in a good, it cannot have an absolute
advantage in the good.
1.
a country can have a comparative advantage in a good at the same time that it
has an
absolute advantage in that good.
1. a
country with an absolute advantage in all goods cannot gain from trade.
Answer: c
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
17.
Given the following Ricardo-type table showing the amount of
labor input needed
to get one unit of output in
each industry in each country:
Wheat Chairs
Malaysia
3 days
2 days
India
10 days 8
days
1. Terms
of trade of 1 wheat:1.25 chairs is not a feasible equilibrium terms of trade.
2.
Terms of trade of 1 wheat:1.5 chairs would give all the gains from trade to
India.
3. Malaysia
has an absolute advantage in both goods and a comparative advantage in
wheat.
1. India
has an absolute advantage in both goods and a comparative advantage in wheat.
Answer: b
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
18.
As a country moves from autarky to trade, the relative price of
the country’s import good will __________ for home consumers, and the relative
price of the country’s export
good __________ for home consumers.
1.
fall; will rise
2. fall;
also will fall
3. rise;
also will rise
4. rise;
will fall
Answer: a
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
19.
Suppose that, with constant opportunity costs, Spain can produce
2,000 units of clothing if it devotes all of its resources to clothing
production and 8,000 units of wheat if it devotes all of its resources to wheat
production. If Spain is opened to trade at a world price ratio of 1 wheat:0.4
clothing (or 1 clothing:2.5 wheat), Spain will export __________; if the world
price ratio were 1 wheat:4 clothing (or 1 clothing:2.5 wheat), Spain would
__________.
1.
wheat; also export wheat
2. wheat;
would export clothing
3. clothing;
also would export clothing
4. clothing;
would be indifferent to trade
Answer: a
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-03
20.
If, in a two-commodity, two-country Classical world, Sweden can
make a unit of furniture with 10 days of labor and a unit of steel with 15 days
labor, while Germany can make a unit of furniture with 12 days of labor and a
unit of steel with 12 days labor, then
1. Sweden
has an absolute advantage in steel and Germany has an absolute advantage in
furniture.
1. Sweden
has a comparative advantage in steel and Germany has a comparative
advantage in furniture.
1.
the pretrade price ratios indicate that Germany will export steel if trade
takes place.
2. the
pretrade price ratio in Sweden is 1 furniture:1.5 steel.
Answer: c
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
21.
Given the following Ricardo-type table showing the amount of
labor input required
to produce one unit of output of
each of the two goods in each of the two countries:
Wheat Clothing
United Kingdom
6
days 5
days
United
States
4
days 3
days
1.
The United Kingdom has an absolute advantage in neither good.
2. The
United States has a comparative advantage in wheat.
3. The
United States has a comparative advantage in both goods.
4. A
post-trade price ratio (terms of trade) of 1 wheat:1.5 clothing is a feasible
equilibrium post-trade price ratio.
Answer: a
Difficulty: 01 Easy
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 03-02
22.
In Question #21 above,
1.
if the United Kingdom were a much larger country than the United States, then,
other
things equal, the terms of trade would tend to be located more
toward the U.S.
pre-trade price ratio than toward the U.K. pre-trade price
ratio.
1. if
world demand (the sum of U.S. demand and U.K. demand) were directed more
toward clothing than toward wheat, other things equal, then the
terms of trade
would tend to be located more toward the U.K. price ratio than
toward the U.S.
pre-trade price ratio.
1. a
post-trade price ratio (terms of trade) of 1 clothing:0.75 wheat would mean
that the
United Kingdom did not gain from trade.
1.
a post-trade price ratio (terms of trade) of 1 wheat:1.2 clothing would give all
the
gains from trade to the United States.
Answer: d
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-03
23.
Suppose that a country in the Classical model has the following
production-possibilities frontier (PPF):
If, in autarky, the country is producing 700 computers and is
located at point M on the
PPF, the country would be producing __________ autos. If the country is
now opened to
trade
at a terms of trade of 1 auto: 2 computers (or 1 computer: 0.5 auto), it would
export __________.
1. 120;
autos
2.
120; computers
3. 280;
autos
4. 280;
computers
Answer: b
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-03
24.
In Question #23 above, suppose that the country, when it is
opened to trade, did
not
change its production combination from the production combination at point M.
In this
situation, how many units of its import good could the country
obtain if it exported all of
the export good that it produced?
1. 240
units
2.
350 units
3. 500
units
4. 800
units
Answer: b
Difficulty: 03 Hard
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 03-03
25.
Country A has the following constant-opportunity-costs
production-possibilities frontier (PPF):
Suppose that this country in autarky is located at point R on
its PPF, where it is producing 300 units of good Y and __________ of good
X. Suppose that country A is now opened to trade and can trade at a terms
of trade of 1X:3Y. Assuming complete specialization in production, the
country will now produce at __________.
1.
50 units; point N and will export good X and import good Y
2. 150
units; point N and will export good X and import good Y
3. 50
units; point M and will export good Y and import good X
4. 150
units; point M and will export good Y and import good X
Answer: a
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-03
26.
Given the following constant-cost production-possibilities
frontiers for Pakistan and India:
Pakistan has an autarky relative price of __________; if trade
begins with India, then
Pakistan would produce at point __________, assuming complete
specialization.
1.
1 cloth:0.5 wheat (i.e., Pcloth/Pwheat =
0.5); A
2. 1
cloth:0.5 wheat (i.e., Pcloth/Pwheat =
0.5); B
3. 1
cloth:2 wheat (i.e., Pcloth/Pwheat =
2); A
4. 1
cloth:2 wheat (i.e., Pcloth/Pwheat =
2); B
Answer: a
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-03
27.
Given the following Ricardo-type table showing the amount of
labor input required
to produce one unit of output of
each of the two goods in each of the two countries:
Shirts Machines
France
3
days 5
days
Germany
2
days 4
days
France has an absolute advantage in __________ and a comparative
advantage in __________.
1. both
goods; machines
2. both
goods; shirts
3.
neither good; machines
4. neither
good; shirts
Answer: c
Difficulty: 02 Medium
Topic: Ricardian Comparative Advantage
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-02
28.
In Question #27 above,
1.
a post-trade price ratio (terms of trade) of 1 shirt:0.75 machine is a feasible
post-trade
price ratio.
2. a
post-trade price ratio (terms of trade) of 1 machine:0.6 shirt is a feasible
post-trade
price ratio and it would give all the gains from trade to
France.
1. a
post-trade price ratio (terms of trade) of 1 machine:0.55 shirt is a feasible
post-trade price ratio and both countries would gain from trade at that price
ratio.
2. other
things equal, if world demand for shirts is much greater than world demand for
machines, then the post-trade price ratio (terms
of trade) will tend to settle toward
or be located at 1 shirt:0.6 machine rather than
settle toward or be located at
1
shirt:0.5 machine.
Answer: d
Difficulty: 02 Medium
Topic: Representing the Ricardian Model with
Production-Possibilities Frontiers
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 03-03
CHAPTER 5
INTRODUCTION TO NEOCLASSICAL TRADE THEORY:
Tools to Be Employed
1. Essay
Questions
1. Suppose
that, from an initial individual consumer equilibrium position in the
indifference curve-budget line diagram, the prices of both goods rise by 10
percent. What happens to the position and slope of the budget line?
Why does the consumer’s level of satisfaction from a given money income
fall? Illustrate and explain. Would it be acceptable for an
economist to say that the level of satisfaction of the consumer fell by exactly
10 percent? Why or why not?
Answer: The budget line shifts inward in a parallel manner. The
slope is unchanged. The consumer will now be on a lower indifference curve. No,
it cannot be claimed that the level of satisfaction of the consumer fell by
exactly 10 percent.
Difficulty: 02 Medium
Topic: The Theory of Consumer Behavior
AACSB: Analytical Thinking
Blooms: Understand
Learning Objective: 05-01
2. Suppose
that, from an initial individual consumer equilibrium position in the
indifference curve-budget line diagram, the price of good X rises while the
price of good Y falls. What will happen to the relative consumption of the two
goods by the consumer and why? Can it be specified whether the consumer’s
level of satisfaction has increased or decreased because of this change in
absolute and relative prices? Why or why not? Could the
satisfaction level of some consumers increase and the satisfaction level of
other consumers decrease because of the price changes? Explain.
Answer: Consumption will shift toward the lower priced good,
i.e., the consumer substitutes the now cheaper good for some of the now
relatively more expensive good. The consumer’s level of satisfaction may rise,
fall, or stay the same.
Difficulty: 03 Hard
Topic: The Theory of Consumer Behavior
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 05-01
3. “If
constant returns to scale exist for a firm, then a 10 percent rise in all
factor prices will lead to a 10 percent decline in the equilibrium quantity of
output for a given budget. However, if increasing returns to scale exist, a 10
percent rise in all factor prices will lead to a less than 10 percent decline
in the equilibrium quantity of output for a given budget.”
Assess the validity of this statement.
Answer: This statement is not valid. The concept of “returns to
scale” only refers to the relationship between a proportional change in all
inputs and the corresponding change in output.
Difficulty: 03 Hard
Topic: Production Theory
AACSB: Analytical Thinking
Blooms: Evaluate
Learning Objective: 05-02
4. Explain,
using the isoquant-isocost diagram, why a rise in the rental rate of capital
coupled with no change in the wage rate will lead to a rise in the price of the
capital-intensive good relative to the price of the labor-intensive good.
Answer: The prices of both goods will rise, but the price
increase of the capital-intensive good will be relatively greater since it uses
relatively more of capital.
Difficulty: 02 Medium
Topic: Production Theory
AACSB: Analytical Thinking
Blooms: Understand
Learning Objective: 05-02
5. Explain
why any point on an economy’s PPF must be
associated with a point on the production efficiency locus in the Edgeworth box
diagram.
Answer: The PPF is essentially a reformatted version of the
production efficiency locus. They convey the same info in a different
“setting.”
Difficulty: 01 Easy
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-03
6. The
textbook has developed the Edgeworth box diagram and the concept of the
production efficiency locus or contract curve in the context of the production
of two goods with two factors. Apply the Edgeworth box apparatus to the
context of consumption of
two goods by two consumers, and, in particular, explain how welfare for the two
consumers as a whole when on the contract curve relates to welfare when the
consumers are not on the contract curve.
Answer: Points off the contract curve depict inefficient
allocations in the sense that one or both consumers can be made better off by a
redistribution of the goods (with no consumer suffering a loss)
.
Difficulty: 03 Hard
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Analytical Thinking
Blooms: Create
Learning Objective: 05-03
1. Multiple-Choice
Questions
7. In
the following Edgeworth box diagram for a country’s production,
1.
point T has greater output of the A good than does point R.
2. output
of the A good is greater at point S as at point R.
3. a
plotting of the output combinations along the “diagonal” results in the
production-
possibilities frontier for this country.
1.
good A is the relatively labor-intensive good and good B is the relatively
capital-
intensive good.
Answer: a
Difficulty: 01 Easy
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-03
8. In
the diagram in Question #7 above,
1. a movement
from point S to point T involves an increase in the capital/labor ratio
used in the production of good A.
1. if
the PPF is plotted from the “contract curve” (or “production efficiency
locus”), the
production combination of goods A and B associated with point R
is on the PPF.
1. if
the PPF is plotted from the “contract curve” (or “production efficiency
locus”), with
good A on the vertical axis and good B on the horizontal axis,
the production
combination of goods A and B associated with the 0B origin
is at the origin of the
PPF graph.
1.
if the PPF is plotted from the “contract curve” (or “production efficiency
locus”),
with good A on the vertical axis and good B on the horizontal
axis, the production
combination of goods A and B associated with point T is further
up the vertical
axis than the production combination associated with point S.
Answer: d
Difficulty: 01 Easy
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-03
9. In
the diagram in Question #7 above, a movement from point S to point T will lead
to
__________ in the capital/labor ratio used in the production of
good A and __________
in the capital/labor ratio used in the production of good B.
1. an
increase; will lead to a decrease
2. an
increase; also will lead to an increase
3.
a decrease; also will lead to a decrease
4. a
decrease; will lead to an increase
Answer: c
Difficulty: 01 Easy
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-03
10.
If, for a consumer, (MUA/PA) is
greater than (MUB/PB), then the consumer
1. has
an incentive to consume relatively more of good A, which will increase his/her
MUA.
1.
has an incentive to consume relatively more of good A, which will
decrease his/her
MUA.
1. has
an incentive to consume relatively more of good B, which will increase his/her
MUB.
1. has
an incentive to consume relatively more of good B, which will decrease his/her
MUB.
Answer: b
Difficulty: 01 Easy
Topic: The Theory of Consumer Behavior
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-01
11.
In the following table of production possibilities for a
country,
Good X Good Y
0 units 13 units
1 unit 10
units
2 units 6
units
3 units 0
units
there are __________ opportunity costs in the production of good
X, and there
are __________ opportunity costs in the production of good Y.
1.
increasing; increasing
2. increasing;
constant
3. constant;
increasing
4. constant;
decreasing
Answer: a
Difficulty: 01 Easy
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-03
12.
Two indifference curves for an individual consumer __________
intersect; two
community indifference curves for a country __________.
1. cannot;
also cannot intersect
2.
cannot; can intersect under some circumstances
3. can;
can also intersect under some circumstances
4. can;
cannot intersect
Answer: b
Difficulty: 01 Easy
Topic: The Theory of Consumer Behavior
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-01
13.
Which one of the following sequences of specifications of
relative preferences for bundles of goods A, B, and C by a consumer indicates
the property of transitivity (where “>” indicates that the preferred bundle
is on the left, “<” indicates that the preferred bundle is on the right, and
“=” means indifference between the bundles)?
1. A
> B; B > C; C > A
2. A
> B; B = C; C = A
3.
A < B; C < A; B > C
4. A =
C; B > C; A > B
Answer: c
Difficulty: 01 Easy
Topic: The Theory of Consumer Behavior
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-01
14.
In the following table of production possibilities for a
country,
Good X
Good Y
400 units
0 units
300 units 100 units
200 units 180 units
100 units 240 units
0 units 280 units
there are __________ opportunity costs when moving to greater
production of good X
and __________ when moving to greater production of good Y.
1.
increasing; decreasing
2. decreasing;
constant
3. constant;
increasing
4.
increasing; increasing
Answer: d
Difficulty: 01 Easy
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-03
15.
Suppose that, in the isoquant-isocost diagram, with given
relative factor prices, an
equilibrium input combination of 10 units of capital and 30
units of labor yields an
output level for the firm of 120 units. Suppose that, for
this firm, at the same relative
factor prices but with a larger budget, an equilibrium input
combination of 15 units of
capital and 45 units of labor yields an output level of 160
units. Viewing these input-
output relationships, an economist would say that, in its
production process, this firm
experiences
1. increasing
returns to scale.
2. constant
returns to scale.
3.
decreasing returns to scale.
4. increasing
returns to scale, constant returns to scale, or decreasing returns to scale –
cannot be determined without more information.
Answer: c
Difficulty: 01 Easy
Topic: Production Theory
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 05-02
16.
In the Edgeworth box diagram for production,
1. a
point off the “contract curve” (or “production efficiency locus”) cannot have
more
production of one of
the goods than can some point on the curve.
1. a
point off the “contract curve” (or “production efficiency locus”) can involve
more
production of both goods
than can any point on the curve.
1.
a movement from autarky to trade can be associated with a movement along
the
“contract curve” (or “production efficiency locus’).
1. the
“contract curve” (or “production efficiency locus”) will always be the
“diagonal”
of the box.
Answer: c
Difficulty: 02 Medium
Topic: The Derivation of the Production Possibilities Frontier
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 05-03
17.
In the following graph showing an isoquant and an isocost line,
at point X,
MPPL/MPPK is __________ w/r and the producer has an incentive to use
relatively more
__________ in producing the given output.
1. greater
than; capital
2. greater
than; labor
3.
less than; capital
4. less
than; labor
Answer: c
Difficulty: 01 Easy
Topic: Production Theory
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 05-02
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