2-1If each person sells goods for which she has the greatest comparative advantage in production, and buys those goods in which she has the least comparative advantage (or a comparative disadvantage), then
A. Correct.
B. Incorrect. Since more total goods will be produced, it is possible for everyone to come out ahead.t
C. Incorrect. Unless fraud occurs, sellers would only sell if selling made them better off than before.
D. Incorrect. Unless fraud occurs, buyers would only buy if buying made them better off than before.
E. Incorrect. Only production on the basis of comparative advantage is necessary for total output to increase.
2-2Trade
A. Incorrect. Trade will only occur if the two traders are NOT in agreement as to the value (or cost of obtaining) all of the goods being exchanged. For example, if you and I agree that a dollar bill in my possession is worth exactly four quarters in your possession, then we have no reason to trade the dollar for the four quarters.However, if I want to buy something from a vending machine that only takes coins, I might value (want) the four quarters more than the dollar bill.If you consider the dollar bill more convenient to carry than the four quarters, you might value the dollar bill more highly than the four quarters.Only when we place such different values on the items might we find it worthwhile to swap or trade, since both of us can get something we want more than what we would be giving up.
B. Incorrect. Since trade is a voluntary act, it will only occur if each of the traders is willing to do it. Thus, unless there is an act of fraud occurring (in which someone is getting something he or she is not expecting) both traders end up getting something they value more than what they are giving up. Both benefit from the trade.
C. Incorrect. By allowing people to obtain things without themselves producing them, trade will actually stimulate specialization. Lower cost producers will be encouraged to produce things for other people so that they can trade for different items they want but can only produce themselves at high cost.
D. Incorrect. By encouraging specialization, trade enhances productivity and increases total production.
E. Correct. Trade encourages specialization, and thus results in greater production. It also tends to put goods into the hands of those consumers who value them most, and thus promotes allocative efficiency.
2-3Transactions costs
A.Correct.
B. Incorrect. Transactions costs include the costs of gathering information about possible alternative exchanges.
C. Incorrect. Transactions costs can be reduced by consulting people (called "middlemen") who specialize in providing information about possible alternative exchanges.
D. Incorrect. Transactions costs can sometimes be reduced by using consumer cooperatives or supermarkets.
E. Incorrect. Transactions costs can sometimes be reduced by using "middlemen."
2-4If the people of Italia all concentrate on producing only food, they could produce 8 tons a year of food. If the people of Italia concentrate on producing only clothing, they can produce 16 tons a year of clothing. On the other hand, the people of Slavia could produce 10 tons of food if they concentrated exclusively on food production, or they instead could produce 30 tons of clothing if they concentrated on clothing production. Which statement is true?
A. Incorrect. To find the cost in each country of producing food, divide the amount of clothing it can produce by the amount of food it can produce. It costs Italia only 2 tons of clothing to produce each ton of food (16 tons of clothing divided by 8 tons of food). It costs Slavia 3 tons of clothing to produce each ton of food (30 tons of clothing divided by 10 tons of food). Italia thus has a comparative advantage in producing food.
B. Correct. To find the cost in each country of producing clothing, divide the amount of food it can produce by the amount of clothing it can produce. It costs Italia one-half a ton of food to produce each ton of clothing (8 tons of food divided by 16 tons of clothing), while it only costs Slavia one-third of a ton of food to produce each ton of clothing (10 tons of food divided by 30 tons of clothing).
C. Incorrect. Slavia has an absolute advantage in producing both food and clothing, but we must examine the costs to determine comparative advantage.
D. Incorrect. Each country has a comparative advantage in producing one of the goods, so trade would benefit both.
E. Incorrect. Each country has a comparative advantage in producing one of the goods, so trade would benefit both.
2-5An economy which fails to realize all of its potential gains from specialization (division of labor) is
A. Incorrect. Only by exploiting all of the possible benefits from division of labor and specialization can an economy achieve productive efficiency.
B. Incorrect. It is not possible for an economy to operate outside its production possibilities curve, as such production combinations are not possible.
C. Incorrect. Operating on its production possibilities curve would mean that the economy is utilizing all of the gains from specialization.
D. Incorrect. Operating on its production possibilities curve would mean that the economy is being efficient.
E. Correct.
2-6Which of the following is the clearest example of a transaction cost?
A. Incorrect. Transactions costs are costs leading up to a trade (such as the costs of finding a movie to see). Paying the price of a movie ticket is part of the trade itself.
B. Incorrect. Transactions costs are cost that have to be borne in order to engage in the trade. A person could see the movie without eating beforehand.
C. Incorrect. Time spent watching the movie may be part of the cost of enjoying the movie, but transactions costs are costs leading up to the trade. Once you have paid to go inside the movie, the transaction is completed.
D. Correct. Transactions costs are costs leading up to the trade. If you must spend time in line waiting to conduct the transaction (buy the ticket) then the cost of waiting is a transactions cost.
E. Incorrect.
2-7Calvin and Hobbes are stranded in an alternative universe. They can produce and consume two goods, "X" and "Y". Calvin's production possibilities are such that he can produce 2X or 2Y per day. Hobbes can produce 6X or 3Y per day. Which of the following will maximize the consumption alternatives available for Calvin and Hobbes?
A. Incorrect. To find the cost to each person of producing "X", divide the amount of "Y" that the person can produce by the amount of "X" that the same person can produce. Calvin's cost of producing "X" is 1Y (2Y divided by 2X), while Hobbes's cost of producing one "X" is one half of a Y (3Y divided by 6X). Thus, Calvin has a comparative advantage in Y and Hobbes in X, so trade will benefit both.
B. Incorrect. If each strives for self-sufficiency, he is losing an opportunity to obtain goods at lower cost from the other producer.
C. Incorrect. Even though Calvin can produce less altogether than Hobbes, their costs of producing are different, so they can trade.
D. Correct. To find the cost to each person of producing "X", divide the amount of "Y" that the person can produce by the amount of "X" that the same person can produce. Calvin's cost of producing "X" is 1Y (2Y divided by 2X), while Hobbes's cost of producing one "X" is one half of a Y (3Y divided by 6X). Thus, Hobbes should produce X and Calvin should produce Y.
E. Incorrect. Each should specialize in the good for which he is low-cost producer. To find the cost to each person of producing "X", divide the amount of "Y" that the person can produce by the amount of "X" that the same person can produce. Calvin's cost of producing "X" is 1Y (2Y divided by 2X), while Hobbes's cost of producing one "X" is one half of a Y (3Y divided by 6X).
2-8For a while, John rented rooms in a duplex that Jane owned. During that time, each of them did their own dishes and vacuuming. Now, they are married and live together in the duplex. Jane does the vacuuming, while John does the dishes. They seem to spend less time doing these chores than when they each did both jobs. This is evidence of
A. Incorrect. Making choices to produce more would be economizing behavior.
B. Incorrect. Technology has not changed.
C. Incorrect. There are gains from relying on others, not self-sufficiency.
D. Correct.
E. Incorrect. Absolute advantage (who can do more) is not mentioned in the question. Even so, it is ability to do things at lowest cost that increases production.
2-9Which of the following best describes the implications of the law of comparative advantage?
A. Incorrect. Total output will be expanded by specialization and trade, and all individuals will be able to obtain things at lower cost.
B. Incorrect. Since all traders engage in trade voluntarily, they all benefit (unless there is fraud involved).
C. Incorrect. Since all traders engage in trade voluntarily, they all benefit (unless there is fraud involved).
D. Incorrect.
E. Correct.
2-10Bart trades his tuna and alfalfa sprout sandwich away to Lisa for a Butterfinger Bar. Since they both agree to trade voluntarily,
A. Incorrect. Lisa and Bart will only trade if they view the value of the items differently.
B. Incorrect. Since Lisa traded away her Butterfinger Bar, she must have valued it less than Bart did (in terms of tuna sandwiches).
C. Correct.
D. Incorrect. Since Bart traded away his tuna sandwich, he must have valued it less than the Butterfinger Bar.