ECON 43400, Exam 1 – Referring to the table above, South

ECON 43400, Exam 1, Spring 2017

Part 1. You are given
16 multiple choice questions. Read each
carefully and choose the best possible answer Multiple-choice questions are
each worth 4 points. Please return the exam to me no later than the beginning
of class on February 14.

Please answer questions 1 – 4 by referring to the following
production information:

Units
of resources required per unit of output
Country Food Manufactured
Goods
Peru 20/100=
2/10 100/20=5
South Korea 40/400=
1/10 400/40=10

1. Referring to the
table above, South Korea has an absolute advantage in the production of:
A. both goods. B. neither good. C. food. D. manufactured goods.

2. South Korea’s
opportunity cost of producing manufactured goods is _____ units of food.
A. 400 B. 40 C. 10 D. 0.1 (1/10th)
g
3. Referring to the
table above, Peru has a comparative advantage in the production of:
A. both goods. B. neither good. C. food. D. manufactured goods.

4. With international
trade, what are the maximum units of manufactured goods Peru would be willing
to
export to South
Korea in exchange for one unit of food?
A. 100 C.
0.2 (1/5th)
B. 20 D.
none; Peru should be exporting food.

5. One reason that
countries do not completely specialize in producing one good is due to the
phenomenon of
increasing
opportunity cost. The cause of
increasing opportunity cost is that:
A. resources are limited.
B. the more of a good consumers have, the less a
marginal unit is valued.
C. technology is limited.
D. resources are differentiated, or
heterogeneous.

6. Each of the
following statements is correct regarding the concept of consumer surplus
except one; which
one?
A. Consumer surplus is the extra demand by
domestic consumers over and above the quantity domestic
producers
are willing to produce (i.e., excess demand).
B. Consumer surplus is the difference between
the highest price that consumers are willing to pay for a unit
of a good
and the market price of the good.
C. Consumer surplus is illustrated as the area
below a demand curve, but above market price.
D. If the US began to import a good at a lower
price than its previous domestic price, consumer surplus for
the good would increase in the US.

7. “Producer surplus”
refers to the:
A. difference between the market price and the
lowest price sellers are willing to accept.
B. extra profit sellers earn when a market is
monopolized.
C.
excess production by an exporting country, over and above what its own
consumers wish to buy.
D. quantity of exports.

Please answer questions 8 – 10 by referring to the following
tables regarding resource requirements for the production of two goods (TABLE
1) and the resource endowments for two countries (TABLE 2). The questions below presume that all the
assumptions of the Hecksher-Ohlin Model hold.

TABLE
1 TABLE 2
Resources
required per unit of output Resource
endowments
Product labor capital Country
labor capital
Cell phones 6
2 = 1/3 labor intensive Switzerland 10 10 =1/1
Banking 4 1 = 1/4 labor intensive US 120 20 =1/6

8. Based upon the
information in TABLE 1
A. the production
of both goods is relatively labor intensive because the labor/capital ratio is
greater than
one.
B. the production
of banking services is relatively labor intensive because the labor/capital
ratio is greater
than one.
C. the production
of cell phones is relatively labor intensive because the production of cell
phones requires
more units
of labor to produce than does banking services.
D. the production
of banking services is relatively labor intensive because the labor/capital
ratio is greater
than that
found for cell phone production.

9. Based upon the
information in TABLE 2 we would describe the US as:
A. relatively
labor and capital scarce.
B. relatively labor
abundant, relatively capital scarce.
C. relatively
labor scarce, relatively capital abundant.
D. relatively
labor and capital abundant.

10. Based upon the
information in both TABLES above, the pattern of trade expected is that
Switzerland will:
A. export both
goods to the US.
B. import both
products from the US.
C. import cell
phones from the US while exporting banking services to the US.
D. import
banking services from the US while exporting cell phones to the US.

11. A central lesson
of the principle of comparative advantage is that a nation gains from
international trade:
A. if it is
larger than its trading partners.
B. by gaining
access to imports at lower opportunity costs than if it produced those goods
domestically.
C. only if it
has an absolute advantage over its trading partners.
D. by
generating large surpluses of exportable goods.

12. “A country has a
comparative advantage in the good that uses intensively the country’s abundant
resource”.
This statement
is known as the:
A. Rybczynski theorem. C. Stolper-Samuelson theorem.
B. Hecksher – Ohlin theorem. D. Absolute Advantage Theorem.

13. “An increase in
the relative price of a commodity raises the real reward of the factor used
intensively in the
production of
that commodity, and lowers the real reward of the other factor”. This statement
is known as
the:
A. Rybczynski theorem. C. Stolper-Samuelson theorem.
B. Hecksher – Ohlin theorem. D. Comparative Advantage theorem.

Please answer question 14 – 16 by referring to the following
information. Initially assume that Chile
does not trade in copper with the rest of the world. In domestic autarky
equilibrium, the Chilean market price is 5 pesos per pound. The equivalent
world price is, say, 20 pesos per pound.
Assume, now, trade in copper begins.

14. As a result of
the commencement of trade in copper, Chile will be expected to become an ______
of
copper.
A.
importer B.
exporter

15. As a result of
the commencement of trade in copper, we would expect that producer surplus in
Chile
will_____ and
producer surplus in the rest of the world will
______.
A. increase /
increase C.
increase / decrease
B. decrease /
increase D.
decrease / decrease

16. One of the
following is NOT an assumption of the Hecksher-Ohlin model of trade; which one?
A. resources
are immobile between countries
B. perfect
competition exists
C. technology
is identical across producers of each particular good, even in different
countries
D. resource
endowments are identical across countries

___________________________________________________________________________________
Part 2. You are given
4 short-answer /problems. Each is worth
10 points.

1. Assume that the
production of one unit of cell phones in the US requires 20 units of resources,
while the
production of one
unit of textiles uses 10 units of resources.
Also assume the world price is 1 unit of cell
phones = 4 units
of textiles Please explain how the US
benefits from specialization in cell phone
production, and
exchanging excess phones for textiles.

2. Suppose that a
country produces crude oil for domestic consumption and possibly for
export. The national
demand and supply
curves for oil in this country are given by the following (P = price per barrel
of oil, QM =
quantity of
barrels of oil):

demand curve: POIL = $310 – 50 × QOIL
supply curve: POIL = $10 + 10 × QOIL

A. Please determine
the equilibrium autarky price and quantity exchanged. (5 points)

B. Suppose the world
price of oil is $110. Will the country
export oil and, if so, how many barrels? (5 points)

3. Assume that the
assumptions of the Hecksher-Ohlin Model hold.
Also assume that presently the US government does not allow French-made
high-speed trains to be sold in the US and France does not allow US wine to be
sold in France. Also assume that wine is
relatively land intensive, but requires little capital, and the US is
relatively land abundant, but France is not. Assume that the production of
high-speed trains is relatively capital intensive and that France is capital
abundant, the US is not. Explain what
would happen to the following players, and why, if France and the US removed
these trade restrictions and free trade was allowed. In your answer be sure to identify the
impact on each of the eight (8) following groups:

US high-speed train producers French
high-speed train producers
US high-speed train consumers French
high-speed train consumers
US land owners French
land owners
US capital owners French
capital owners

2. Please answer
parts A through E by referring to the diagrams below. The diagram to the left represents the market
for cell phones in the United States (the “low-price” exporting
country), while the diagram to the right represents the rest of the world (ROW)
(considered here to be the “high-price” importing country).

UNITED STATES ROW
price price Supply
a
A

b c
Supply
C E F e f g h
B PW = world price

G H j

J Demand Demand
0 QDUS QSUS
Quantity 0
k m n Quantity

A. Consumer surplus
in the United States in autarky is given by the area bounded by points: _________.
(1 points)
B. Producer surplus
in the United States in autarky is given by the area bounded by points: _________ .
(1 points)
C. As a result of
free-trade, producer surplus in the US increases by the area bounded by points:
_________
(1 points)
D. If PW represents
the equilibrium world price of cell phones and the US is the only exporter, the
quantity of
exports
represented by QSUS – QDUS in the left hand diagram is equal to the quantity of
cell phones
represented by
which distance (between which letters) in the right-hand diagram? (2 points)

E. One area that
captures part of the benefit of trade is area cfg in the right-hand
diagram. Yet this area
represents a loss
to producers in the ROW. In terms of the
use of the entire world’s resources, why does area
cfg represent an
improvement in efficiency? (5 points)