Question 1

As long as two people have different opportunity costs, each can gain from trade with the other, since trade allows each person to obtain a good at a price lower than his or her opportunity cost.

Accepted Answer

This is the basic principle of comparative advantage, which states that trade benefits both parties as long as their opportunity costs of producing different goods are different. By specializing in producing the good in which they have a lower opportunity cost, each person can trade with the other and both can end up with more of both goods than they would have had otherwise.

Question 2

Adam Smith wrote that a person should never attempt to make at home what it will cost him more to make than to buy.

Accepted Answer

This statement is known as the principle of absolute advantage and was discussed in Adam Smith's book "The Wealth of Nations." Smith believed that individuals and nations should specialize in producing goods where they have an absolute advantage (i.e. can produce the good more efficiently and at a lower cost) and trade with others for goods they cannot produce as efficiently.

Question 3

The principle of comparative advantage states that, regardless of the price at which trade takes place, everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage.

Accepted Answer

The principle of comparative advantage suggests that countries or individuals will benefit from trade if they specialize in producing goods for which they have a lower opportunity cost, not regardless of the price at which trade takes place. The benefits from trade depend on the relative prices of goods, which should reflect comparative advantages.

Question 4

For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.

Accepted Answer

This is known as the Principle of Comparative Advantage, which states that both parties will benefit from trade as long as the price they agree upon falls between the two parties' opportunity costs. If the price is too high or too low, one party may lose out on potential gains from trade.

Question 5

Specialization and trade can make everyone better off if a person can obtain goods at prices that are less than that person's opportunity cost.

Accepted Answer

This is the basis of the principle of comparative advantage, which states that individuals and countries should specialize in producing the goods or services that they can produce at the lowest opportunity cost and then trade with others for the goods or services that they cannot produce as efficiently. By doing so, everyone can benefit from being able to obtain goods and services at lower prices than what it would cost them to produce them themselves.

Question 6

The gains from specialization and trade are based on absolute advantage.

Accepted Answer

The gains from specialization and trade are based on comparative advantage, not absolute advantage. Comparative advantage focuses on the opportunity cost of producing a good or service, while absolute advantage focuses on producing a good or service more efficiently than another producer.

Question 7

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

Accepted Answer

Trade allows individuals and businesses to focus on producing goods and services that they are relatively better at producing, while also accessing goods and services that others produce relatively more efficiently. This results in increased productivity, innovation, and economic growth, which can benefit society as a whole.

Question 8

In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Together, they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

Accepted Answer

Moira's productivity is higher for sweaters than for scarves, while Tori's productivity is higher for scarves than for sweaters. Therefore, if Moira focuses on knitting only sweaters and Tori focuses on knitting only scarves, they can maximize their productivity and produce more output in total.

Question 9

It takes Anne 3 hours to make a pie and 4 hours to make a shirt. It takes Mary 2 hours to make a pie and 5 hours to make a shirt. Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade.

Accepted Answer

Anne has a comparative advantage in making shirts as she can produce a shirt in fewer hours than Mary, while Mary has a comparative advantage in making pies as she can produce a pie in fewer hours than Anne. By specializing in their respective areas of comparative advantage, and then trading their products (Anne selling shirts to Mary in exchange for pies), both Anne and Mary can benefit and be better off than if they tried to produce both products themselves.

Question 10

It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Courtney and Ross cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.

Accepted Answer

Courtney has a comparative advantage in washing and polishing cars because she can do it in less time than Ross. Ross, by focusing on producing corn, where their productivity is the same, allows both to benefit from specialization and trade based on Courtney's lower opportunity cost for car washing.

Question 11

David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation.

Accepted Answer

David Ricardo did indeed write the book Principles of Political Economy and Taxation in 1817.

Question 12

Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods.

Accepted Answer

Even if one country has an absolute advantage in the production of both goods, they can still specialize in the production of the good in which they have a comparative advantage and import the other good from the other country. This leads to increased efficiency and productivity, resulting in gains from trade for both countries.

Question 13

Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, Ellie has a comparative advantage in the production of ice cream.

Accepted Answer

Ellie's opportunity cost of producing one apple pie is higher in terms of ice cream, meaning she has to give up less ice cream to produce apple pies compared to Brendan. This implies Brendan has a comparative advantage in apple pies, and Ellie in ice cream, as comparative advantage is determined by who has the lower opportunity cost in production.

Question 14

Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream.

Accepted Answer

Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream, which means she gives up 1/2 gallon of ice cream when she produces one apple pie. Thus, her cost of producing one apple pie is 1/2 gallon of ice cream.

Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, which means he gives up 1/4 gallon of ice cream when he produces one apple pie. Thus, his cost of producing one apple pie is 1/4 gallon of ice cream.

If they were to trade, Ellie would be willing to sell one apple pie for anything greater than her opportunity cost, which is 1/2 gallon of ice cream. Brendan would be willing to buy one apple pie for anything less than his opportunity cost, which is 1/4 gallon of ice cream.

They can make a mutually beneficial trade by settling on a price between 1/2 gallon and 1/4 gallon of ice cream per apple pie. Given the information provided, a price of 1/3 gallon of ice cream per apple pie would be mutually beneficial, since Ellie's cost is higher than that and Brendan's cost is lower than that. Therefore, the statement is true.

Question 15

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Differences in opportunity cost mean that two parties can specialize in producing the good or service where they have a lower opportunity cost, while the other party specializes in producing the good or service where they have a higher opportunity cost. This allows for an overall increase in productivity and output, leading to gains from trade for both parties.

Question 16

Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person specializes in the activity for which he or she has the lower opportunity cost.

Accepted Answer

This statement is true as trade enables individuals or nations to specialize in producing those goods and services that they can produce most efficiently, which leads to a lower opportunity cost, and then trade with others who specialize in producing other goods and services, resulting in lower prices for all.

Question 17

For both parties to gain from trade, the price at which they trade must lie exactly in the middle of the two opportunity costs.

Accepted Answer

The price at which both parties gain from trade does not necessarily have to lie exactly in the middle of the two opportunity costs. As long as the price is lower than one party's opportunity cost and higher than the other party's opportunity cost, both parties can gain from trade.

Question 18

When each person specializes in producing the good in which he or she has a comparative advantage, each person can gain from trade but total production in the economy is unchanged.

Accepted Answer

When each person specializes according to their comparative advantage and then trades, total production in the economy increases because resources are being used more efficiently, leading to an increase in overall output.

Question 19

Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin. Fred and Barney both gain from the exchange. We can conclude that, for Barney, the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes.

Accepted Answer

We cannot determine whether the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes for Barney based on this information alone. It simply shows that both parties benefited from the exchange.

Question 20

Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.

Accepted Answer

This statement is true.

Quiz 3: Interdependence and the Gains From Trade