Question 1

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 2

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, the two countries can still specialize in the goods they have a comparative advantage in and trade with each other, resulting in gains from trade for both countries.

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

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

It is not possible for one person to have a comparative advantage over the other in both goods. The concept of comparative advantage implies that one person can produce a good at a lower opportunity cost than the other, but if one person has a comparative advantage in both goods, then that person has a lower opportunity cost for producing both goods, which is not possible.

Question 5

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 below the high opportunity cost and above the low opportunity cost. This is known as the "mutually beneficial price range." As a result, the statement is false.

Question 6

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 7

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 to produce a good or service at a lower opportunity cost than others, while absolute advantage refers to the ability to produce more of a good or service than others with the same amount of resources. Comparative advantage is the basis for mutual gains in trade.

Question 8

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 theory of comparative advantage, which states that individuals or countries should specialize in producing goods for which they have a lower opportunity cost and trade with others who have a higher opportunity cost for those goods. By doing so, both parties can gain from the exchange and enjoy a higher overall level of welfare.

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

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 goods and services in which they have a comparative advantage, meaning that they can produce them at a lower opportunity cost than others. This results in increased efficiency, productivity, and output, ultimately leading to higher economic growth and improved living standards for all parties involved in the trade.

Question 11

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 allows individuals to focus on producing goods or services in which they have a comparative advantage, while trade allows them to exchange their surplus for goods or services in which they do not have a comparative advantage. This results in a more efficient allocation of resources, and ultimately, lower prices for consumers. If an individual can obtain a good at a price that is lower than their opportunity cost of producing it themselves, then they will be better off by trading for that good.

Question 12

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 twice as many pages as Olivia in one minute, and he can also type more words per minute than her. This means that he has an absolute advantage in both editing and typing. However, when it comes to comparative advantage, Timmy should focus on editing since he has a higher opportunity cost of typing (losing out on editing pages) compared to Olivia, who has a higher opportunity cost of editing (losing out on typing words). On the other hand, Olivia has an absolute advantage in typing, but she should focus on typing since she has a higher opportunity cost of editing.

Question 13

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

Accepted Answer

This is the principle of comparative advantage, which states that both parties can benefit from trade if each specializes in producing the good they have a lower opportunity cost for, and the price at which they trade lies between their respective opportunity costs.

Question 14

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Differences in opportunity cost between individuals or countries allow for specialization and trade, leading to more efficient allocation of resources and increased overall production and consumption.

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

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 a bushel of corn (2 bushels of soybeans compared to Tony's 3 bushels of soybeans), which means he has a comparative advantage in corn production.

Question 17

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

Let's calculate the output of Moira and Tori separately for knitting only sweaters and only scarves:
- Moira knitting only sweaters: in one month, Moira can knit 2 sweaters, so in total she can produce 2 sweaters.
- Tori knitting only scarves: in one month, Tori can knit 3 scarves, so in total she can produce 3 scarves.
Together, they can produce a total of 2 sweaters + 3 scarves = 5 items. 
If Moira knits only sweaters and Tori knits only scarves, they would produce a total of 2 sweaters + 4 scarves = 6 items, which is more than 5. Therefore, it is true that together they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

Question 18

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 19

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 principle of comparative advantage, which is the basis for trade.

Question 20

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 make a shirt in less time than it takes her to make a pie. Similarly, Mary has a comparative advantage in making pies since she can make a pie in less time than it takes her to make a shirt. By specializing in their respective areas of comparative advantage and trading with each other, they can both benefit and end up with more pies and shirts than if they tried to make everything themselves.

Quiz 3: Interdependence and the Gains From Trade