Question 1

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, which means he can produce corn at a lower opportunity cost or "cost" of giving up soybeans. This gives Hank the comparative advantage in producing corn.

Question 2

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 has a higher opportunity cost for scarves (1 sweater = 2 scarves) compared to Tori (1 sweater = 3 scarves), making Moira relatively better at knitting sweaters and Tori relatively better at knitting scarves. By specializing in these tasks, they maximize their combined output.

Question 3

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 they trade does not necessarily have to lie exactly in the middle of the two opportunity costs, but rather where both parties agree to trade and feel that they are benefitting from the exchange.

Question 4

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 2 pages in one minute compared to Olivia's 1 page, giving him an absolute advantage in editing. Additionally, Timmy's opportunity cost of editing is lower than Olivia's as he would only have to give up typing 40 words per minute to edit, while Olivia would have to give up typing 100 words per minute to edit. Therefore, Timmy also has a comparative advantage in editing. On the other hand, Olivia can type 100 words in one minute compared to Timmy's 80 words, giving her an absolute advantage in typing. Additionally, Olivia's opportunity cost of typing is lower than Timmy's as she would only have to give up editing half a page per minute to type, while Timmy would have to give up editing 2 pages per minute to type. Therefore, Olivia also has a comparative advantage in typing.

Question 5

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

According to the theory of comparative advantage, each person should specialize in producing the good in which they have the lowest opportunity cost. Therefore, it is unlikely for one person to have a comparative advantage in both goods.

Question 6

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 individuals or countries should specialize in producing goods in which they have a lower opportunity cost, and trade with others to obtain goods in which they have a higher opportunity cost. By doing so, both parties can benefit from the exchange and achieve higher levels of consumption than they would be able to achieve on their own.

Question 7

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Opportunity cost refers to the cost of giving up one opportunity in order to pursue another. Differences in opportunity cost between individuals or countries means that they are relatively better at producing certain goods or services than others. This creates the potential for gains from trade, as they can specialize in producing what they are relatively better at and trade with others for goods or services they are relatively worse at producing.

Question 8

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 9

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

The statement that both Fred and Barney gain from the exchange does not necessarily imply anything about Barney's opportunity cost of producing 1 pumpkin relative to 2 tomatoes. It only indicates that each values what they receive more than what they give up.

Question 10

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 basic principle of comparative advantage, which states that trade is beneficial when each person or country produces the good or service for which they have the lower opportunity cost. By specializing in this activity and trading with others who specialize in other activities, both parties can benefit and obtain goods at prices lower than their opportunity cost of producing the good themselves.

Question 11

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 refers to the ability of a country or individual to produce a certain good or service at a lower opportunity cost than another country or individual.

Question 12

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

When individuals or nations specialize in producing goods for which they have a comparative advantage and trade with others, they can obtain the goods at lower prices than their opportunity cost of production. This makes both parties better off as they can consume more goods than they could have produced on their own.

Question 13

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 14

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 people to specialize in activities in which they have a comparative advantage, leading to increased efficiency and productivity, and ultimately benefiting everyone in society.

Question 15

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 16

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 17

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 because she can make a shirt in fewer hours than Mary (4 hours vs. 5 hours). Mary has a comparative advantage in making pies because she can make a pie in fewer hours than Anne (2 hours vs. 3 hours). By specializing in their comparative advantages and trading with each other, they can both increase their efficiency and productivity. Therefore, Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade.

Question 18

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, both countries can still benefit from trade by specializing in the production of the good in which they have a comparative advantage and then trading with each other.

Question 19

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 because for trade to be mutually beneficial, both parties must give up less than what they would have had to give up in the absence of trade. This means that the price at which they trade must be lower than the opportunity cost for the party selling the good or service, and higher than the opportunity cost for the party buying the good or service. Therefore, the price must lie between the two opportunity costs.

Question 20

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.

Quiz 3: Interdependence and the Gains From Trade