(solution) EC340 Midterm Exam – There are two goods (beef and chicken) and two factors of production

(solution) EC340 Midterm Exam – There are two goods (beef and chicken) and two factors of production

Previous Exam EC340 Midterm Exam Instructions Please remember to fill in your name and PID number on the scantron. No calculators are allowed. No books or notes are allowed. You need to turn in both the exam sheets and the scantron. There are 45 multiple-choice questions on the exam. Type A NAME____________________________ SIGNATURE_______________________ 1. There are two goods (beef and chicken) and two factors of production (land and labor). The amounts of land and labor used to produce one unit of each good are given in the table below, where land is measured in hectares and labor is measured in the number of worker years. Based on this information, the production of chicken is land intensive. Factor Used to Produce Beef Chicken Land 1 2 Labor 3 4 a. True b. False 2. In the two-country Heckscher-Ohlin model, trade results in incomplete specialization in both countries. a. True b. False 3. Inter-industry trade refers to imports and exports within the same industry. a. True b. False 4. Both the two-country Heckscher-Ohlin and Ricardian models assume that both countries have imperfect competitive labor markets. a. True b. False 5. In the Ricardian model, trade generates winners and losers. a. True b. False 6. The HO theory has been abandoned because of the Leontief paradox a. True b. False 7. Increasing returns to scale occur when a firm’s average costs of production increase as its output decreases. a. True b. False 8. In the basic model of intra-industry trade, the average costs incurred within a firm does not depend on the size of the market. a. True b. False 9. One of the assumptions of the basic model of intra-industry trade is that all firms have the same fixed and marginal costs. a. True b. False 10. Intra-industry trade is based on the logic of comparative advantage. a. True b. False 11. If all trade was motivated by comparative advantage, the Grubel-Lloyd index for all industries would equal 1. a. True b. False 12. Both the two-country Heckscher-Ohlin and Ricardian models assume that factor mobility is not allowed between countries. a. True b. False 13. In the Specific Factor model (or Ricardo-Viner Model), a fixed factor in the exporting sector is always better off in free trade. a. True b. False 14. The conclusion that a labor-abundant country exports the good using labor intensively in production and a capital-abundant country exports the good using capital intensively in production is known as the Rybczynski theorem. a. True b. False 15. Consider an economy that can produce two good (ice cream and soda) using labor as the only input. The production possibilities curve for this economy is shown to the right. Suppose that each worker can produce 25 gallons of ice cream. How many workers does this economy have? Gallons of Ice Cream 100 50 a. 100 b. 50 c. 5 d. 4 e. 2 16. Consider an economy that can produce either cheese or grapes. Labor is the only factor of production. The economy’s production possibilities curve is shown to the right. In the absence of trade, this economy will produce 80 pounds of cheese and 20 bushels of grapes. In this equilibrium, a worker would earn more by spending all of his or her time producing grapes compared to what he or she could earn if producing cheese 25 a. True b. False Gallons of Soda Pounds of Cheese 90 80 a. True b. False 17. Consider an economy that can produce either jeans or shirts. Labor is the only factor of production. The economy’s production possibilities curve is shown to the right. In the absence of trade, this economy will produce 270 pair of jeans and 90 shirts. Suppose that this economy is now opened to trade, and that it can buy or sell jeans for $50 per pair and buy or sell shirts for $50 each. In this case, the economy will increase production of shirts to 900 and reduce production of jeans to zero 50 20 180 Bushels of Grapes Jeans 300 270 90 900 Shirts Questions 18-22 refer to the following information. Suppose that there are two countries (Home and Foreign) that can produce two goods (yogurt and milk) using labor as the only input. The production possibilities curves for the two countries are represented in the diagram the right. To save space, both PPCs are drawn on the same set of axes. The Home PPC is represented by the dashed line, the Foreign PPC is represented by the solid line. Home has 100 workers, Foreign has 200 workers. In autarky, each country produces 300 milk and 400 yogurt. Milk 800 Home PPC 600 300 Foreign PPC 400 600 800 Yogurt 18. Home has an absolute advantage in producing milk; Foreign has an absolute advantage in producing yogurt. a. True b. False 19. Home has a comparative advantage in producing milk; Foreign has a comparative advantage in producing yogurt. a. True b. False 20. With trade, the equilibrium wage for Home workers will equal the equilibrium wage for Foreign workers. a. True b. False 21. Suppose that with trade, the price of yogurt in terms of milk is 3/4. Both countries will produce milk, but only Foreign will produce yogurt. a. True b. False 22. Suppose that with trade, the price of yogurt in terms of milk in the year 2010 was 3/4, but increases to 1 in the year 2010. This price change represents an improvement in Home’s terms of trade but a deterioration in Foreign’s terms of trade. a. True b. False Questions 23-27 refer to the following information. There are only two countries (Mexico and Guatemala) and two goods (avocados and broccoli). Output per worker for each of the Avocados two goods in each of the two countries is given in the table Broccoli to the right. Output per Worker Mexico Guatemala 5 4 10 5 23. In this example, both countries have an absolute advantage in broccoli. a. True b. False 24. Guatemala has a comparative advantage in avocados. a. True b. False 25. What will be the pattern of imports and exports if trade is permitted between these two countries? a. Guatemala will import broccoli from Mexico and export avocados to Mexico b. Mexico will import broccoli from Guatemala and export avocados to Guatemala c. Guatemala will export avocados to Mexico, but neither country will export broccoli d. Mexico will export broccoli to Guatemala, but neither country will export avocados e. Trade will not take place because Guatemala is not competitive with Mexico 26. Suppose that with trade, the price of broccoli is $100 per unit. The highest possible equilibrium price for avocados is $200. a. True b. False 27. Suppose that trade is permitted between these two countries and that the Guatemalan wage is $8. What is the lowest possible equilibrium Mexican wage? a. $5 b. $7 c. $10 d. $12 e. $16 28. The production possibilities curve and consumption Cheese possibilities frontier for a hypothetical economy are 100 given in the diagram to the right. The heart-icon and the smile-icon represent autarky and free trade consumption point. How many shoes does this economy import? 50 a. 25 b. 50 c. 75 d. 100 e. 0 29. Suppose that there are two goods (coffee and sugar) and two countries (Brazil and Costa Rica). Output per worker and labor supply in each of the two countries is given in the table to the right. Suppose that these two countries trade with each other, and that The price of coffee in terms of sugar is 5. At this relative price, the world demand for coffee is 300 and the world demand for sugar is 250. How much coffee will Brazil produce? 25 50 Coffee Sugar Labor 100 Shoes Output per Brail Costa 1 5 5 5 100 50 a. 300 b. 250 c. 150 d. 50 e. 0 30. There are only two countries (France and Germany) and Output per two goods (croissants and pretzels). Labor is the only input. France Germany output per worker for each of the two goods in each of the two Croissants 2 3 countries is given in the table to the right. Suppose that both Pretzels 1 4 countries initially produce both goods. Now let Germany switch 10 workers from the production of croissants to the production of pretzels. At the same time, let France switch 20 workers from the production of pretzels to the production of croissants. What happens to the world production of the two goods? a. World production of croissants increases by 40, world production of pretzels increase by 40 b. World production of croissants increases by 10, world production of pretzels increase by 20 c. World production of croissants increases by 20, world production of pretzels increase by 10 d. World production of croissants increases by 20, world production of pretzels increase by 30 e. World production of croissants increases by 40, world production of pretzels increase by 20 31. Consider an economy that can produce oranges or bananas. In the absence of trade, equilibrium production is 200 oranges and 300 bananas. The production possibilities curve for this economy is illustrated in the diagram to the right. What is the opportunity cost of producing one more banana? Oranges 500 300 200 a. 1/2 orange b. 2/3 orange c. 3/4 orange d. 1 orange e. 2 orange 32. Consider an economy that can produce two goods (wheat and cotton). The production possibilities frontier and trading possibilities for this economy are illustrated in the diagram to the right. The heart-icon and the smileicon stand for production and consumption with trade. Based on this diagram, we can infer that this economy has a comparative advantage in the production of wheat. 300 400 500 Bananas Wheat 550 500 400 200 a. True b. False 33. There are two countries (Korea and Japan) and two factors of production (capital and labor). The endowments of the two factors are given in the table to the right, where labor is measured as number of workers years and capital is measured in dollars. Based on this information, Japan is abundant in capital while Korea is abundant in labor. 200 Capital Labor 400 600 Cotton Factor Korea Japan 300 500 200 250 a. True b. False 34. Suppose that there are two factors of production (capital and labor). By definition, an economy is capital abundant if the ratio of capital per worker is larger than 1/2. a. True b. False 35. There are two countries (Germany and France) and two Factors factors of production (skilled labor and unskilled labor). Germany France The endowments of the two factors are given in the table Skilled labor 600 400 to the right, where both types of labor are measured as Unskilled 200 100 number of worker years. Which of the following results can be deduced from combining Heckscher-Ohlin theorem with Stolper Samuelson theorem? a. Trade benefits both German and French skilled workers. b. Trade harms both German and French unskilled workers. c. Trade benefits all German workers and harms all French workers. d. Trade benefits German skilled workers and harms German unskilled workers. e. Trade benefits French skilled workers and harms French unskilled workers. 36. There are two goods (beef and chicken) and two factors of Production (land and labor). The amounts of land and labor Used to produce one unit of each good are given in the table to the right, where land is measured in hectares and labor is measured in the number of workers years. Based on this information, the production of beef is land intensive. Factors Used to Produce Beef Chicken Land 3 1 Labor 4 1 a. True b. False 37. The production possibilities curve for two countries (Home and Foreign) are shown in the diagram to the right. Assume that capital and labor are the two inputs and that Foreign is relatively labor abundant. Given all of the assumptions of the Heckscher-Ohlin model, which of the following statements can be inferred? Steel a. Foreign is also capital abundant b. Aluminium is intensive in the use of labor c. Steel uses more capital than labor d. Foreign workers would be harmed by trade with Home e. Foreign has an absolute advantage in the production of both goods Foreign Home Aluminium 38. Consider an economy that satisfies all of the assumptions of the Heckscher-Ohlin model. Call the two goods computers and televisions and the two inputs capital and labor. Assume that televisions are labor intensive. Suppose that the economy moves along its production possibilities curve to produce more televisions and fewer computers. What happens to the economy-wide demand for capital and labor a. Demand for capital falls; demand for labor increases b. Demand for capital is unchanged; demand for labor increases c. Demand for capital may increase or decrease; demand for labor falls d. Demand for capital increases; demand for labor falls e. Demand for capital increases; demand for labor is unchanged 39. Consider an economy that can produce two goods (cars and shoes) using capital and labor. Assume that in the short run, the capital used to produce cars cannot be used produce shoes, and the capital used to produce shoes cannot be used to produce cars. In contrast, labor can easily move back and forth between sectors. Suppose there is an increase in the price of shoes, holding constant the price of cars. In this case, the demand for capital used to produce shoes increases; demand for capital used to produce cars is unchanged, and the economy-wide demand for labor increases. a. True b. False 40. Chile and the United States use capital and labor to produce wheat and automobiles. The United States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. According to the Heckscher-Ohlin model: a. Chilean workers should support U.S.-Chile free trade. b. Chilean owners of capital should support U.S.-Chile free trade. c. U.S. owners of capital should oppose U.S.-Chile free trade. d. Both U.S. and Chilean owners of capital should oppose US-Chile free trade. 41. Wassily Leontief reported that the capital intensity of U.S. imports appeared to be higher than the capital intensity of U.S. exports. Why was this result considered paradoxical? a. The United States was considered to be capital abundant, and this result would be the opposite of that predicted by the Heckscher-Ohlin model b. The United States was considered to be technologically advanced, and this result would be the opposite of that predicted by the Heckscher-Ohlin model c. The United States was considered to be an economic superpower, and this result would be the opposite of that predicted by the Ricardo-Viner model d. The United States was considered to be a highly unionized economy, and this result would be the opposite of that predicted by the Ricardo-Viner model e. The United States was considered to host many multinational corporations, and this result would be the opposite of that predicted by the Heckscher-Ohlin model -42, 43, 44, 45 are omitted-The End-