Question 1

Timmy can edit 2 pages in one minute and he can type 80 words in one minute. Olivia can edit 1 page in one minute and she can type 100 words in one minute. Timmy has an absolute advantage and a comparative advantage in editing, while Olivia has an absolute advantage and a comparative advantage in typing.

Accepted Answer

Timmy can edit more pages in one minute than Olivia, making him have an absolute advantage in editing. In addition, Timmy's opportunity cost of editing a page is only 40 words (since he can also type 80 words in one minute), while Olivia's opportunity cost of editing a page is 100 words (since she can type 100 words in one minute but can only edit 1 page). Therefore, Timmy has a comparative advantage in editing. On the other hand, Olivia has an absolute advantage in typing, as she can type more words in one minute than Timmy. Olivia's opportunity cost of typing one word is only 0.01 pages (since she can also edit 1 page in one minute), while Timmy's opportunity cost of typing one word is 0.025 pages (since he can only edit 2 pages in one minute). Therefore, Olivia has a comparative advantage in typing.

Question 2

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 3

Suppose Hank and Tony can both produce corn. If Hank's opportunity cost of producing a bushel of corn is 2 bushels of soybeans and Tony's opportunity cost of producing a bushel of corn is 3 bushels of soybeans, then Hank has the comparative advantage in the production of corn.

Accepted Answer

Hank's opportunity cost of producing corn is lower than Tony's, meaning he gives up less soybeans to produce the same amount of corn. This gives him a comparative advantage in the production of corn.

Question 4

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 5

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 since she can produce one shirt in 4 hours while Mary can produce one shirt in 5 hours. Mary has a comparative advantage in making pies since she can produce one pie in 2 hours while Anne can produce one pie in 3 hours. Therefore, they can both benefit from specialization and trade. Anne can focus on making shirts while Mary can focus on making pies and they can then exchange some of their production with each other, leading to both of them being better off.

Question 6

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

In one month, Moira can knit 2 sweaters or 4 scarves, so the opportunity cost of one sweater is 2 scarves. In one month, Tori can knit 1 sweater or 3 scarves, so the opportunity cost of one sweater is 3 scarves. Therefore, Moira has a comparative advantage in sweater knitting and Tori has a comparative advantage in scarf knitting. Both of them producing goods based on their comparative advantage would result in a greater total output.

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 countries to focus on producing and exporting goods and services in which they are most efficient, and import goods and services in which they are less efficient, leading to increased efficiency, productivity, and economic growth for all parties involved.

Question 8

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 conclude anything about the opportunity cost of producing 1 pumpkin for Barney based on the given information. The fact that both parties gain from the exchange only tells us that the exchange was beneficial for both of them, but it doesn't necessarily mean that one party had a higher opportunity cost than the other.

Question 9

Zora can produce 4 quilts in a week and she can produce 1 corporate website in a week. Lou can produce 9 quilts in a week and he can produce 2 corporate websites in a week. Zora has the comparative advantage in quilts and the absolute advantage in neither good, while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods.

Accepted Answer

Comparative advantage is determined by who has the lower opportunity cost in producing a good, not by who produces more. Zora has the comparative advantage in corporate websites because she gives up fewer quilts to produce a website compared to Lou. Lou has the absolute advantage in both goods because he can produce more of both quilts and websites in a week than Zora.

Question 10

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 statement is true according to the principle of comparative advantage in economics. In trade, each person can specialize in producing the goods or services that they have a lower opportunity cost for, and then exchange those goods or services with the other person who has a relatively higher opportunity cost for producing them. This way, both parties can benefit from trade by obtaining goods or services at a price lower than their respective opportunity costs.

Question 11

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

Accepted Answer

While one country may have an absolute advantage in the production of both goods, they may also have a comparative advantage in one of the goods. By focusing on producing and exporting the good in which they have a comparative advantage, and importing the other good from the other country, both countries can benefit from trade. This is because each country can specialize in the production of the good in which they have a comparative advantage, leading to more efficient production and lower costs for both countries.

Question 12

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Opportunity cost refers to the benefits foregone of choosing one option over another. If two individuals or countries have different opportunity costs for producing a certain good or service, it means they can specialize in the area where they have a lower opportunity cost and trade with the other entity for goods or services where the other entity has a lower opportunity cost. This leads to gains from trade because both entities can obtain goods or services that they otherwise would not have been able to produce efficiently on their own.

Question 13

When there are two people and each is capable of producing two goods, it is possible for one person to have a comparative advantage over the other in both goods.

Accepted Answer

Comparative advantage means that one person can produce a good at a lower opportunity cost than another. If one person has a comparative advantage in one good, the other person must have a comparative advantage in the other good, assuming only two goods are involved.

Question 14

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 is the fundamental principle of comparative advantage, which explains why trade is mutually beneficial for two countries or individuals who have different opportunity costs for producing a good.

Question 15

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 16

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

Accepted Answer

This statement is true. If the price at which they trade is lower than the seller's opportunity cost, they will lose out on potential profits. If the price is higher than the buyer's opportunity cost, they will be paying more than they need to. Thus, for both parties to gain, the price must be somewhere in between the two opportunity costs.

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

For both parties to gain from trade, the price at which they trade must lie between their respective opportunity costs but not necessarily in the middle of the two. The exact location of the price depends on the relative strengths of demand and supply from the two parties.

Question 18

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

Specialization and trade allow individuals and countries to focus on producing goods and services that they have a comparative advantage in, which can result in increased efficiency and lower costs. If individuals can purchase goods at prices lower than the cost of producing them themselves, they can benefit from this exchange and improve their overall welfare.

Question 19

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 20

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. This is because even if one country has an absolute advantage in producing all goods, both countries can still benefit from trade if they specialize in the goods they have a comparative advantage in producing.

Quiz 3: Interdependence and the Gains From Trade