A worker in Alpha needs 2 hours to make a shirt and 6 hours to make a radio. What is Alpha's opportunity cost of producing one radio?
3 shirts
✓
1/3 of a shirt
6 shirts
12 shirts
Correct Answer
3 shirts
The 6 hours spent on one radio could have made 6 / 2 = 3 shirts, so one radio costs 3 shirts. 1/3 of a shirt is the cost of one shirt measured in radios, the inverse. 6 shirts counts the hours for a radio as if each shirt took one hour. 12 shirts multiplies the hours instead of dividing them.
Category: Opportunity Cost
Question 2
Country X needs 1 hour to make a ton of steel and 2 hours to make a ton of rice. Country Y needs 3 hours for a ton of steel and 3 hours for a ton of rice. Which statement is correct?
X has a comparative advantage in both goods
Y has a comparative advantage in rice
✓
Y has an absolute advantage in rice
X has a comparative advantage in rice
Correct Answer
Y has a comparative advantage in rice
A ton of rice costs X 2 tons of steel (2 hours / 1 hour) but costs Y only 1 ton of steel (3 hours / 3 hours), so Y gives up less to make rice. X has a comparative advantage in both goods is impossible, because a lower cost of one good means a higher cost of the other. Y has an absolute advantage in rice is wrong, since X makes rice in fewer hours. X has a comparative advantage in rice is wrong, since X gives up more steel per ton of rice.
Category: Comparative Advantage
Question 3
A country that can produce more of a good than another country using the same amount of resources has what in that good?
A comparative advantage
A gain from trade
An absolute advantage
✓
Economies of scale
Correct Answer
An absolute advantage
Absolute advantage compares how much output each country gets from the same resources. A comparative advantage depends on opportunity cost, not on raw productivity. A gain from trade is the extra consumption that specialization and trade make possible. Economies of scale describe average cost falling as a firm's output grows.
Category: Absolute Advantage
Question 4
According to the theory of comparative advantage, a country should export a good for which it has which feature?
Greater total output than its partner
Higher wages than its partner
Larger population than its partner
Lower opportunity cost than its partner
✓
Correct Answer
Lower opportunity cost than its partner
Countries gain by exporting goods they can make while giving up less of other goods than their trading partner gives up. Greater total output than its partner describes absolute advantage, which does not decide the pattern of trade. Higher wages than its partner says nothing about relative costs between goods. Larger population than its partner affects how much a country can make, not which good is relatively cheap for it.
Category: Comparative Advantage
Question 5
Islandia and Mainland each have 60 worker hours. Islandia needs 1 hour per fish and 3 hours per loaf of bread; Mainland needs 2 hours per fish and 1 hour per loaf. Before trade, each splits its hours equally between the goods. If Islandia then specializes fully in fish and Mainland fully in bread, how many more loaves does the world produce than before?
20 loaves
✓
30 loaves
15 loaves
60 loaves
Correct Answer
20 loaves
Before trade, Islandia makes 30 / 3 = 10 loaves and Mainland makes 30 / 1 = 30 loaves, for 40 in all; with full specialization Mainland makes 60 loaves, so world bread rises by 20. 30 loaves compares Mainland's new output only with its own old output and ignores Islandia's 10 loaves. 15 loaves is the gain in fish (60 minus 45), not bread. 60 loaves is total bread after specializing, not the increase.
Category: Gains From Trade
Question 6
In Islandia a loaf of bread costs 3 fish to produce, and in Mainland a loaf costs 2 fish. At which trading price for one loaf, measured in fish, would both countries gain when Mainland trades bread for Islandia's fish?
1.5 fish
2.5 fish
✓
3.5 fish
4 fish
Correct Answer
2.5 fish
A trade helps both sides when the price lies between the two domestic opportunity costs, here between 2 and 3 fish per loaf, and 2.5 fish is inside that range. At 1.5 fish Mainland would receive less than the 2 fish a loaf costs it, so it would refuse. At 3.5 fish Islandia would pay more than the 3 fish it costs to bake a loaf itself. At 4 fish Islandia is even worse off, so it would make its own bread.
Category: Gains From Trade
Question 7
A country can produce every good using fewer resources than its trading partner. Why can it still gain from trade?
Its partner pays it a fee on every import
Its workers earn more than its partner's
Its opportunity costs differ from its partner's
✓
Its currency is worth more than its partner's
Correct Answer
Its opportunity costs differ from its partner's
Gains from trade come from differences in opportunity cost, so a country that is better at everything still gains by focusing where its edge is largest and trading for the rest. Its partner pays it a fee on every import describes no part of the theory. Its workers earn more than its partner's is not the source of the gain. Its currency is worth more than its partner's plays no role in the opportunity cost logic of the model.
Category: Absolute Advantage
Question 8
North needs 2 workers to make 100 tables and 1 worker to make 100 chairs. South needs 6 workers for 100 tables and 2 workers for 100 chairs. Which trade pattern follows comparative advantage?
North exports chairs and South exports tables
North exports tables and chairs to South
South exports tables and chairs to North
North exports tables and South exports chairs
✓
Correct Answer
North exports tables and South exports chairs
A table costs North 2 chairs (2 workers could make 200 chairs) but costs South 3 chairs (6 workers could make 300 chairs), so North is the low-cost table maker and South is the low-cost chair maker. North exports chairs and South exports tables reverses the opportunity costs. North exports tables and chairs to South confuses North's absolute advantage in both goods with comparative advantage. South exports tables and chairs to North is wrong because South has the higher cost of tables.
Category: Absolute Advantage
Question 9
In simple two-country trade models, what does a straight-line production possibilities frontier show about opportunity cost?
It is constant along the frontier
✓
It rises as output of a good grows
It falls as output of a good grows
It is zero at every point
Correct Answer
It is constant along the frontier
A straight line has the same slope everywhere, so each extra unit of one good always costs the same amount of the other good. It rises as output of a good grows describes a frontier bowed outward, which is more realistic but not a straight line. It falls as output of a good grows would require a frontier bowed inward. It is zero at every point would mean nothing is given up, which contradicts scarcity.
Category: Opportunity Cost
Question 10
The United States both exports cars to other countries and imports cars from them. What is this pattern of trade called?
Inter-industry exchange
Intra-industry trade
✓
Dumping
Protectionism
Correct Answer
Intra-industry trade
Trade in which countries exchange goods from the same industry, such as cars for cars, is intra-industry trade, and a large share of trade among high-income countries takes this form. Inter-industry exchange would mean trading goods from different industries, such as wheat for machinery. Dumping is selling goods abroad below their cost of production. Protectionism is government policy that limits imports.
Category: Intra-Industry Trade
Question 11
A phone is designed in one country, its memory chips are made in a second country, and it is put together in a third. What does this illustrate?
A free trade agreement
An absolute disadvantage
Splitting up the value chain
✓
Import substitution
Correct Answer
Splitting up the value chain
The value chain is the series of steps that turns inputs into a finished good, and placing different steps in different countries is called splitting up the value chain. A free trade agreement is a pact that lowers trade barriers among members. An absolute disadvantage means needing more resources than another country to make a good. Import substitution is a policy of replacing imports with domestic production, the opposite of spreading production abroad.
Category: Intra-Industry Trade
Question 12
A factory's average cost per unit is $40 for 50 units, $25 for 100 units, $15 for 200 units and $15 for 300 units. At what output do economies of scale stop?
At 100 units
At 300 units
At 50 units
At 200 units
✓
Correct Answer
At 200 units
Average cost keeps falling until 200 units and stays at $15 after that, so economies of scale are used up at 200 units. At 100 units average cost is still falling, so economies of scale continue past that point. 300 units gives the same $15 average cost as 200 units, so nothing more is gained. 50 units is where average cost is highest, at the start of the falling stretch.
Category: Economies of Scale
Question 13
Why does international trade especially help a small economy in an industry with large economies of scale?
Its firms can sell to a market bigger than the home market
✓
Its firms can raise prices without losing any customers
Its firms no longer face any foreign competitors
Its firms can stop paying for their inputs
Correct Answer
Its firms can sell to a market bigger than the home market
Economies of scale require large output, and selling abroad lets firms in a small country produce at a scale the home market alone could not support. Its firms can raise prices without losing any customers is wrong, because trade adds competitors. Its firms no longer face any foreign competitors reverses the effect of opening to trade. Its firms can stop paying for their inputs is not something trade makes possible.
Category: Economies of Scale
Question 14
Relative to the size of their economies, which countries tend to gain the most from lowering barriers to international trade?
Large, high-income economies
Small, low-income economies
✓
Economies with the largest populations
Economies with the most farmland
Correct Answer
Small, low-income economies
Small, low-income economies have few domestic firms and a small home market, so access to world markets adds more to their output and competition than it does for a large economy. Large, high-income economies gain too, but they already have much trade within their own borders. Economies with the largest populations have big home markets, which shrinks the relative gain. Economies with the most farmland are not singled out by the theory as the largest gainers.
Category: Benefits of Open Trade
Question 15
After specializing and trading, where does a country's consumption point lie relative to its own production possibilities frontier?
Inside the frontier
Exactly on the frontier
Outside the frontier
✓
At one end of the frontier
Correct Answer
Outside the frontier
Trade lets a country consume combinations of goods it could not produce by itself, which places its consumption point beyond its own frontier. Inside the frontier would mean the country wastes resources and consumes less than it could. Exactly on the frontier is the best a country can do without trade. At one end of the frontier is where a fully specialized country produces, not where it consumes after trading.
Category: Gains From Trade
Question 16
What is the idea that a country's lower-cost goods can change over time as its firms build skills and grow larger called?
Static absolute advantage
Diminishing marginal returns
Natural resource endowment
Dynamic comparative advantage
✓
Correct Answer
Dynamic comparative advantage
Dynamic comparative advantage holds that the goods a country makes at low opportunity cost are not fixed by climate or geography but can shift as learning and scale change productivity. Static absolute advantage is not the term for change over time. Diminishing marginal returns describes falling extra output as more of one input is added. Natural resource endowment refers to fixed gifts of nature, the opposite of an advantage that develops.
Category: Comparative Advantage
Question 17
Each worker in Country R can produce 30 barrels of oil or 10 tons of lumber. Each worker in Country S can produce 20 barrels of oil or 20 tons of lumber. Which country has the comparative advantage in lumber, and why?
Country S, because it gives up less oil per ton
✓
Country R, because it gives up less oil per ton
Country S, because it produces more oil per worker
Country R, because it produces more oil per worker
Correct Answer
Country S, because it gives up less oil per ton
A ton of lumber costs R 3 barrels of oil (30 / 10) but costs S only 1 barrel (20 / 20), so S makes lumber at the lower opportunity cost. Country R, because it gives up less oil per ton is wrong, since R gives up 3 barrels. Country S, because it produces more oil per worker is wrong, since S makes 20 barrels per worker against R's 30. Country R, because it produces more oil per worker is true about oil but describes R's absolute advantage in oil, not lumber.
Category: Comparative Advantage
Question 18
In the basic model of comparative advantage, what happens if two countries have exactly the same opportunity costs for both goods?
Both gain from specializing fully
Neither gains from specializing and trading
✓
Only the larger country gains from trade
Only the more productive country gains
Correct Answer
Neither gains from specializing and trading
Gains from specialization come from differences in opportunity cost, so when the costs are identical, trading cannot give either country a good more cheaply than it can make it at home. Both gain from specializing fully would require some difference in costs. Only the larger country gains from trade is wrong, because size does not create a cost difference. Only the more productive country gains is wrong, because absolute productivity alone does not create gains from trade.
Category: Comparative Advantage
Question 19
Workers who repeat one specialized task become faster and find better ways to do it. Which source of gains from trade does this describe?
Economies of scale from larger plants
Lower tariffs on imported inputs
Learning and innovation from specialization
✓
Natural resources such as fertile land
Correct Answer
Learning and innovation from specialization
When firms and workers concentrate on narrow tasks, practice and experimentation raise their productivity, which is a gain separate from comparative advantage and scale. Economies of scale from larger plants come from producing more output, not from practice. Lower tariffs on imported inputs reduce costs but do not describe workers getting better at a task. Natural resources such as fertile land are fixed endowments, not something workers develop.
Category: Economies of Scale
Question 20
Producing one more ton of steel at home costs a country 4 tons of wheat. What is the highest price, in tons of wheat per ton of steel, it could pay in trade and be no worse off than making the steel itself?
1/4
2
8
4
✓
Correct Answer
4
The domestic opportunity cost sets the limit: paying exactly 4 tons of wheat leaves the country as well off as producing steel itself, and any lower price makes it better off. A price of 1/4 is the cost of wheat measured in steel, the inverse. A price of 2 is one the country would gladly accept, but it is not the highest it could pay. A price of 8 is more than the steel costs at home, so the country would lose by trading.
Category: Gains From Trade