Question 1

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

Trade allows for specialization based on comparative advantage, which means each person specializes in what they are relatively better at, resulting in overall lower opportunity cost for all parties involved in the trade.

Question 2

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 people to focus on producing goods or services at which they have a comparative advantage. This means they can produce goods at a lower opportunity cost than others. By trading with others who have different comparative advantages, each person can obtain goods at a lower price than their own opportunity cost of producing them, making everyone better off.

Question 3

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 4

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 closer to the opportunity cost of the party with the comparative disadvantage. This allows them to specialize in the production of goods or services in which they have a comparative advantage and trade for goods or services in which they have a comparative disadvantage. This results in both parties benefiting from the trade.

Question 5

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, which is more than Olivia's 1 page per minute, giving him an absolute advantage in editing. Additionally, his editing rate compared to his typing rate (2 pages vs 80 words) is better than Olivia's editing rate compared to her typing rate (1 page vs 100 words), giving him a comparative advantage in editing as well. On the other hand, Olivia can type 100 words in one minute, which is more than Timmy's 80 words per minute, giving her an absolute advantage in typing. Additionally, her typing rate compared to her editing rate (100 words vs 1 page) is better than Timmy's typing rate compared to his editing rate (80 words vs 2 pages), giving her a comparative advantage in typing as well.

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 statement is true according to the principle of comparative advantage in economics. If two people specialize in producing the goods they have a lower opportunity cost for and trade with each other, they can both consume more of both goods than if they tried to produce everything themselves. Therefore, trade benefits both parties as long as they have different opportunity costs.

Question 7

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 has the lower opportunity cost of producing corn (2 bushels of soybeans) compared to Tony (3 bushels of soybeans). This means that Hank can produce a bushel of corn at a lower cost than Tony, giving him the comparative advantage in corn production.

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

Since Moira is more productive in knitting sweaters and Tori is more productive in knitting scarves, it would be more efficient for them to specialize in those respective items. This would result in a higher total output.

Question 9

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

Accepted Answer

When individuals specialize in activities in which they have a comparative advantage, they become more efficient, leading to an increase in overall productivity and output. By trading with others who have specialized in different activities, individuals can obtain the goods and services they need at lower costs than if they were to produce everything themselves. This leads to a higher standard of living for everyone involved in the trade.

Question 10

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 11

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 solely on the fact that he agreed to the trade. He may have gladly traded the pumpkin for 2 tomatoes because his own personal preference or opportunity cost for tomatoes is lower than the cost for pumpkins. Alternatively, he may have had an abundant supply of pumpkins and found it easy to part with one for a relatively small amount of tomatoes.

Question 12

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

According to the principle of comparative advantage, each person should specialize in the activity for which they have a lower opportunity cost. Anne has a lower opportunity cost in making shirts because she gives up 3/4 of a pie for each shirt (since she can make a pie in 3 hours and a shirt in 4 hours), whereas Mary gives up 2.5 pies for each shirt (since she can make a pie in 2 hours and a shirt in 5 hours). Conversely, Mary has a lower opportunity cost in making pies because she gives up 0.4 of a shirt for each pie (since she can make a shirt in 5 hours and a pie in 2 hours), whereas Anne gives up 0.75 of a shirt for each pie (since she can make a shirt in 4 hours and a pie in 3 hours). Therefore, Anne should specialize in making shirts and Mary in making pies, and they should trade to maximize their combined output.

Question 13

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 is the ability of a country or company to produce a good or service at a lower opportunity cost than another country or company, while absolute advantage is the ability of a country or company to produce more of a good or service than another country or company using the same amount of resources.

Question 14

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 15

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 a basic principle of international trade theory known as the principle of comparative advantage. If both parties can specialize in producing the goods they have a lower opportunity cost for, and trade with each other, they can both benefit and achieve higher total output than if they did not trade. The price at which they trade should be between the two opportunity costs to ensure that each party gains from the transaction.

Question 16

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 17

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

Accepted Answer

This is because each country has a comparative advantage in producing one of the goods, meaning that they can produce it at a lower opportunity cost than the other country. This allows both countries to specialize in what they are relatively better at producing, and then trade with each other to obtain the other good at a lower opportunity cost than if they produced it themselves.

Question 18

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Opportunity cost refers to the value of the next best alternative that is given up to pursue a certain action. Differences in opportunity cost mean that individuals or countries have different comparative advantages in producing certain goods or services. This creates the potential for gains from trade as they can specialize in producing the goods or services they have a comparative advantage in, and trade with others who have a different comparative advantage. By doing so, they can obtain goods or services that they would have to give up more of to produce themselves, leading to overall efficiency and increased wealth.

Question 19

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 20

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 principle of comparative advantage, each person should specialize in producing the good in which they have a lower opportunity cost. If one person has a comparative advantage in producing one good, then the other person should have a comparative advantage in producing the other good. Therefore, it is not possible for one person to have a comparative advantage over the other in both goods.

Quiz 3: Interdependence and the Gains From Trade