ECON 43400, Exam 1 – Referring to the table above, South

ECON 43400, Exam 1 – Referring to the table above, South

Subject: Economics    / General Economics
Question

ECON 43400, Exam 1, Spring 2017

Part 1. You are given 16 multiple choice questions. Read each carefully and choose the best possible answer Multiple-choice questions are each worth 4 points. Please return the exam to me no later than the beginning of class on February 14.

Please answer questions 1 – 4 by referring to the following production information:

Units of resources required per unit of output

Country Food Manufactured Goods

Peru 20/100= 2/10 100/20=5

South Korea 40/400= 1/10 400/40=10

1. Referring to the table above, South Korea has an absolute advantage in the production of:

A. both goods. B. neither good. C. food. D. manufactured goods.

2. South Korea’s opportunity cost of producing manufactured goods is _____ units of food.

A. 400 B. 40 C. 10 D. 0.1 (1/10th)

g

3. Referring to the table above, Peru has a comparative advantage in the production of:

A. both goods. B. neither good. C. food. D. manufactured goods.

4. With international trade, what are the maximum units of manufactured goods Peru would be willing to

export to South Korea in exchange for one unit of food?

A. 100 C. 0.2 (1/5th)

B. 20 D. none; Peru should be exporting food.

5. One reason that countries do not completely specialize in producing one good is due to the phenomenon of

increasing opportunity cost. The cause of increasing opportunity cost is that:

A. resources are limited.

B. the more of a good consumers have, the less a marginal unit is valued.

C. technology is limited.

D. resources are differentiated, or heterogeneous.

6. Each of the following statements is correct regarding the concept of consumer surplus except one; which

one?

A. Consumer surplus is the extra demand by domestic consumers over and above the quantity domestic

producers are willing to produce (i.e., excess demand).

B. Consumer surplus is the difference between the highest price that consumers are willing to pay for a unit

of a good and the market price of the good.

C. Consumer surplus is illustrated as the area below a demand curve, but above market price.

D. If the US began to import a good at a lower price than its previous domestic price, consumer surplus for

the good would increase in the US.

7. “Producer surplus” refers to the:

A. difference between the market price and the lowest price sellers are willing to accept.

B. extra profit sellers earn when a market is monopolized.

C. excess production by an exporting country, over and above what its own consumers wish to buy.

D. quantity of exports.

Please answer questions 8 – 10 by referring to the following tables regarding resource requirements for the production of two goods (TABLE 1) and the resource endowments for two countries (TABLE 2). The questions below presume that all the assumptions of the Hecksher-Ohlin Model hold.

TABLE 1 TABLE 2

Resources required per unit of output Resource endowments

Product labor capital Country labor capital

Cell phones 6 2 = 1/3 labor intensive Switzerland 10 10 =1/1

Banking 4 1 = 1/4 labor intensive US 120 20 =1/6

8. Based upon the information in TABLE 1

A. the production of both goods is relatively labor intensive because the labor/capital ratio is greater than

one.

B. the production of banking services is relatively labor intensive because the labor/capital ratio is greater

than one.

C. the production of cell phones is relatively labor intensive because the production of cell phones requires

more units of labor to produce than does banking services.

D. the production of banking services is relatively labor intensive because the labor/capital ratio is greater

than that found for cell phone production.

9. Based upon the information in TABLE 2 we would describe the US as:

A. relatively labor and capital scarce.

B. relatively labor abundant, relatively capital scarce.

C. relatively labor scarce, relatively capital abundant.

D. relatively labor and capital abundant.

10. Based upon the information in both TABLES above, the pattern of trade expected is that Switzerland will:

A. export both goods to the US.

B. import both products from the US.

C. import cell phones from the US while exporting banking services to the US.

D. import banking services from the US while exporting cell phones to the US.

11. A central lesson of the principle of comparative advantage is that a nation gains from international trade:

A. if it is larger than its trading partners.

B. by gaining access to imports at lower opportunity costs than if it produced those goods domestically.

C. only if it has an absolute advantage over its trading partners.

D. by generating large surpluses of exportable goods.

12. “A country has a comparative advantage in the good that uses intensively the country’s abundant resource”.

This statement is known as the:

A. Rybczynski theorem. C. Stolper-Samuelson theorem.

B. Hecksher – Ohlin theorem. D. Absolute Advantage Theorem.

13. “An increase in the relative price of a commodity raises the real reward of the factor used intensively in the

production of that commodity, and lowers the real reward of the other factor”. This statement is known as

the:

A. Rybczynski theorem. C. Stolper-Samuelson theorem.

B. Hecksher – Ohlin theorem. D. Comparative Advantage theorem.

Please answer question 14 – 16 by referring to the following information. Initially assume that Chile does not trade in copper with the rest of the world. In domestic autarky equilibrium, the Chilean market price is 5 pesos per pound. The equivalent world price is, say, 20 pesos per pound. Assume, now, trade in copper begins.

14. As a result of the commencement of trade in copper, Chile will be expected to become an ______ of

copper.

A. importer B. exporter

15. As a result of the commencement of trade in copper, we would expect that producer surplus in Chile

will_____ and producer surplus in the rest of the world will ______.

A. increase / increase C. increase / decrease

B. decrease / increase D. decrease / decrease

16. One of the following is NOT an assumption of the Hecksher-Ohlin model of trade; which one?

A. resources are immobile between countries

B. perfect competition exists

C. technology is identical across producers of each particular good, even in different countries

D. resource endowments are identical across countries

___________________________________________________________________________________

Part 2. You are given 4 short-answer /problems. Each is worth 10 points.

1. Assume that the production of one unit of cell phones in the US requires 20 units of resources, while the

production of one unit of textiles uses 10 units of resources. Also assume the world price is 1 unit of cell

phones = 4 units of textiles Please explain how the US benefits from specialization in cell phone

production, and exchanging excess phones for textiles.

2. Suppose that a country produces crude oil for domestic consumption and possibly for export. The national

demand and supply curves for oil in this country are given by the following (P = price per barrel of oil, QM =

quantity of barrels of oil):

demand curve: POIL = $310 – 50 × QOIL

supply curve: POIL = $10 + 10 × QOIL

A. Please determine the equilibrium autarky price and quantity exchanged. (5 points)

B. Suppose the world price of oil is $110. Will the country export oil and, if so, how many barrels? (5 points)

3. Assume that the assumptions of the Hecksher-Ohlin Model hold. Also assume that presently the US government does not allow French-made high-speed trains to be sold in the US and France does not allow US wine to be sold in France. Also assume that wine is relatively land intensive, but requires little capital, and the US is relatively land abundant, but France is not. Assume that the production of high-speed trains is relatively capital intensive and that France is capital abundant, the US is not. Explain what would happen to the following players, and why, if France and the US removed these trade restrictions and free trade was allowed. In your answer be sure to identify the impact on each of the eight (8) following groups:

US high-speed train producers French high-speed train producers

US high-speed train consumers French high-speed train consumers

US land owners French land owners

US capital owners French capital owners

2. Please answer parts A through E by referring to the diagrams below. The diagram to the left represents the market for cell phones in the United States (the “low-price” exporting country), while the diagram to the right represents the rest of the world (ROW) (considered here to be the “high-price” importing country).

UNITED STATES ROW

price price Supply

a

A

b c

Supply

C E F e f g h

B PW = world price

G H j

J Demand Demand

0 QDUS QSUS Quantity 0 k m n Quantity

A. Consumer surplus in the United States in autarky is given by the area bounded by points: _________.

(1 points)

B. Producer surplus in the United States in autarky is given by the area bounded by points: _________ .

(1 points)

C. As a result of free-trade, producer surplus in the US increases by the area bounded by points: _________

(1 points)

D. If PW represents the equilibrium world price of cell phones and the US is the only exporter, the quantity of

exports represented by QSUS – QDUS in the left hand diagram is equal to the quantity of cell phones

represented by which distance (between which letters) in the right-hand diagram? (2 points)

E. One area that captures part of the benefit of trade is area cfg in the right-hand diagram. Yet this area

represents a loss to producers in the ROW. In terms of the use of the entire world’s resources, why does area

cfg represent an improvement in efficiency? (5 points)