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CHAPTER 16—COMPARATIVE ADVANTAGE AND THE GAINS FROM INTERNATIONAL TRADE
MULTIPLE CHOICE
1) Since World War II, there has been a worldwide movement away from free trade policies.
a. True
b. False
Answer: B
2) In general, a society will benefit more, the more self-sufficient it is.
a. True
b. False
Answer: B
3) In general, a society will benefit more, the more interdependent it is.
a. True
b. False
Answer: A
4) International trade occurs whenever
a. two nations have achieved internal economic efficiency
b. one of the trading nations is self-sufficient
c. one nation can profit from trade at the expense of another
d. two nations can benefit from trading with each other
e. labor is cheaper in one country than in another
Answer: D
5) If goods are produced abroad but consumed domestically,
a. those goods are termed imports
b. international trade has not occurred
c. the domestic economy is economically inefficient
d. there are no gains from specialization
e. those goods are termed exports
Answer: A
6) A nation has a comparative advantage in producing a good if it has a lower opportunity
cost of producing that good than other countries have.

a. True
b. False
Answer: A
7) Assume that Spain can produce a commodity using fewer resources than any other
country. Spain will export this commodity even if other countries have a lower opportunity
cost of producing it.
a. True
b. False
Answer: B
8) Assume that India has a comparative advantage in producing a computer game. The
United States has an absolute advantage in producing the same game. Mutually advantageous
trade will have India producing and exporting the game while the United States will
specialize in producing something else.
a. True
b. False
Answer: A
9) If Armenia can produce rugs more efficiently than any other country, it does not
necessarily benefit from producing rugs for international trade.
a. True
b. False
Answer: A
10) If Japan can produce each unit of steel using fewer resources than Canada uses,
a. Canada has an absolute advantage in steel production
b. Japan has a comparative advantage in steel production
c. Canada has a comparative advantage in steel production
d. Canada may have an absolute advantage in producing steel
e. Japan has an absolute advantage in steel production
Answer: E
11) Which of the following statements is true?
a. Exports tend to decrease economic efficiency.
b. A nation should specialize in producing a good in which it has an absolute advantage.
c. A nation should specialize in producing a good only when it has both an absolute and a
comparative advantage.

d. A nation should specialize in producing a good in which it has a comparative advantage.
e. International trade does not reflect the benefits of specialization.
Answer: D
12) Which of the following must be true in order to engage in advantageous international
trade?
a. It must be producing at a point on its production possibilities frontier.
b. It must be economically efficient.
c. It must have a comparative advantage in producing one of the goods being traded.
d. There must be no potential Pareto improvements available in the economy.
e. It must have an absolute advantage in producing one good being traded.
Answer: C
13) Suppose that a nation has an absolute advantage in the production of all goods. In this
instance, it
a. has no incentive to engage in international trade
b. is producing at a point on its production possibilities frontier
c. has no unemployment
d. also has a comparative advantage in the production of those goods
e. should specialize in producing the goods for which it has a lower opportunity cost than
other countries
Answer: E
Figure 16-1
Number of workers needed to produce one unit of each of the following goods:

14) What can be said regarding absolute advantage in production for the two countries shown
in Figure 16-1?
a. Colombia has an absolute advantage in producing both calculators and radios.
b. Korea has an absolute advantage only in producing calculators.
c. Korea has an absolute advantage in producing both radios and calculators.
d. Neither country has an absolute advantage in producing radios.
e. Colombia has an absolute advantage only in producing calculators.

Answer: E
15) What can be said regarding comparative advantage in production for the two countries
shown in Figure 16-1?
a. Colombia has a comparative advantage in producing both calculators and radios.
b. Korea has a comparative advantage in producing radios and Colombia has a comparative
advantage in producing calculators.
c. Korea has a comparative advantage in producing both radios and calculators.
d. Neither country has a comparative advantage in producing radios.
e. Colombia has a comparative advantage only in producing radios.
Answer: B
16) If all we know is that the opportunity cost of a car equals 100 refrigerators in France, and
200 refrigerators in Italy, we can conclude
a. nothing about which nation has the absolute advantage in refrigerator production
b. that France has a comparative advantage in refrigerator production
c. that mutually beneficial international trade might involve the market exchange of 1 car for
80 refrigerators (whereby France would gain more than Italy)
d. that mutually beneficial international trade might involve the market exchange of 1 car for
300 refrigerators (whereby Italy would gain more than France)
e. that France has the absolute advantage in car production
Answer: A
17) Mutually beneficial international trade between two countries depends on
a. each country having an absolute advantage in the production of a different good
b. one country being worse (requiring more resources) than the other in the production of
every good
c. at least one country having a zero opportunity cost in the production of at least one good
d. one country being relatively better at producing a good (which makes the other country
relatively worse at it)
e. one country being relatively better at producing all goods
Answer: D
18) If Panama has a high opportunity cost of producing salmon steaks, then it should export
salmon steaks.
a. True
b. False

Answer: B
19) Assume the North Island of New Zealand can produce 2,000 fishing poles or 20 kayaks
per day and the South Island can produce 1,000 fishing poles or 5 kayaks per day. The South
Island has a comparative advantage in producing kayaks.
a. True
b. False
Answer: B
20) For each watch Switzerland produces, it gives up the opportunity to produce 50 pounds of
cheese. Germany can produce one watch at a cost of 100 pounds of cheese. Which of the
following is true?
a. The opportunity cost of producing watches is greater in Switzerland.
b. The opportunity cost of producing cheese is greater in Switzerland.
c. The opportunity cost of producing cheese is the same in both countries.
d. It is impossible to compare costs because the two countries use different technologies.
e. In the two countries combined, the cost of producing one watch is 150 pounds of cheese.
Answer: B
21) Suppose that for each automobile Japan produces it must forego producing 40 computers.
The United States must forego producing 80 computers for each automobile it produces.
Which of the following is true?
a. Japan has a comparative advantage in producing computers.
b. the U.S. has a comparative advantage in producing computers.
c. the U.S. has a comparative advantage in producing automobiles.
d. the U.S. has an absolute advantage in producing automobiles.
e. the opportunity cost of producing computers is the same for Japan and the U.S.
Answer: B
22) Assume Japan must forego producing 60 computers for each automobile it produces.
Moreover, the United States can produce one automobile if it forgoes producing 80
computers. Which of the following is true?
a. The United States has a lower opportunity cost of producing automobiles.
b. The United States has a comparative advantage in producing automobiles.
c. Japan has a comparative advantage in producing computers.
d. No trade will occur between Japan and the United States.
e. Japan has a lower opportunity cost of producing automobiles.

Answer: E
23) In a Mexican factory, each worker can produce 1/8 of a vase or 1/16 of a statue per hour.
If there are 400 workers at the factory, the maximum number of vases that could be produced
in one hour is
a. 400
b. 25
c. 50
d. 100
e. 80
Answer: C
24) In a Mexican factory, each worker can produce 1/8 of a vase or 1/16 of a statue per hour.
If there are 400 workers at the factory, the maximum number of statues that could be
produced in one hour is
a. 50
b. 100
c. 80
d. 25
e. 160
Answer: D
25) In a Mexican factory, each worker can produce 1/8 of a vase or 1/16 of a statue per hour.
If there are 400 workers at the factory, the opportunity cost of one statue is
a. 1/2 of a vase
b. 1/8 of a vase
c. 8 vases
d. 16 vases
e. 2 vases
Answer: E
26) In a Mexican factory, each worker can produce 1/8 of a vase or 1/16 of a statue per hour.
If there are 400 workers at the factory, the opportunity cost of one vase is
a. 2 statues
b. 8 statues
c. 1/2 of a statue

d. 16 statues
e. 1/16 of a statue
Answer: C
27) Comparative advantage is determined by the
a. elasticities of demand for a good in two countries
b. opportunity costs of producing a good in two different countries
c. presence of absolute advantages in production
d. degrees of allocative efficiency within each economy
e. amounts of resources required to produce a good in different countries
Answer: B
Figure 16-2
Number of workers needed to produce one unit of each of the following goods:

28) In Figure 16-2, if Korea produces two fewer radios, then how many more calculators
could it produce?
a. 12
b. 2
c. 1
d. 4
e. 6
Answer: C
29) In Figure 16-2, if Colombia produces four fewer calculators, then how many more radios
could it produce?
a. 8
b. 2
c. 16
d. 4
e. 12
Answer: B
30) In Figure 16-2, what can be said regarding comparative advantage?

a. Colombia has a comparative advantage in producing radios.
b. Korea has a comparative advantage in producing both radios and calculators.
c. Korea has a comparative advantage in producing calculators.
d. Colombia has a comparative advantage in producing calculators.
e. Colombia has a comparative advantage in producing both radios and calculators.
Answer: D
Figure 16-3
Quantities of goods that can be produced in one day with available resources:

31) In Figure 16-3, the opportunity cost in Costa Rica of producing one additional bicycle is
a. 10 rugs
b. 20 rugs
c. 4 rugs
d. 5 rugs
e. 1/5 of a rug
Answer: D
32) In Figure 15-3, the opportunity cost in Panama of producing one additional rug is
a. 4 bicycles
b. 5 bicycles
c. 1/4 of a bicycle
d. 1/5 of a bicycle
e. 2 bicycles
Answer: C
33) In Figure 16-3, if Costa Rica and Panama have identical resources, then Panama has a(n)
a. absolute advantage only in producing bicycles
b. comparative advantage in producing both bicycles and rugs
c. absolute advantage only in producing rugs
d. comparative advantage only in producing rugs
e. absolute advantage in producing both rugs and bicycles

Answer: E
34) Consider the following information on labor hours needed per unit of output:
France Italy
Computers 50 40
Wine 25 10
Ignoring nonlabor inputs, which of the following statements is correct?
a. France has an absolute advantage in the production of both goods.
b. France has a comparative advantage in the production of both goods.
c. the opportunity cost of a computer in Italy is 4 units of wine.
d. the opportunity cost of a unit of wine in France is 2 computers.
e. France produces more computers that Italy produces wine.
Answer: C
35) Consider the following table on labor hours needed per unit of output:
France Italy
Computers 50 40
Wine 25 10
Ignoring nonlabor inputs, which of the following statements is correct?
a. All of the following are correct.
b. The opportunity cost of a computer equals 1/4 unit of wine in Italy.
c. The opportunity cost of a computer equals 1/2 unit of wine in France.
d. Italy has a comparative advantage in computers.
e. Italy has a comparative advantage in wine.
Answer: E
36) Consider the following table on output producible per 100 labor hours:
France Italy
Computers 50 40
Wine 25 10
Which of the following statements is correct?
a. All of the following are correct.
b. France has a comparative advantage in producing computers.

c. Italy's opportunity cost is 4 units of wine per computer.
d. France produces more computers than Italy does.
e. France produces more wine than Italy does.
Answer: B
37) For each watch Denmark produces, it gives up the opportunity to produce 50 pounds of
cheese. France can produce two watches at a cost of 150 pounds of cheese. Which of the
following is true?
a. Denmark has a comparative advantage in producing both watches and cheese.
b. France has a comparative advantage in producing both watches and cheese.
c. France has the comparative advantage in producing watches.
d. Denmark has the comparative advantage in producing watches.
e. Denmark has the comparative advantage in producing cheese.
Answer: D
38) For each watch Switzerland produces, it gives up the opportunity to produce 50 pounds of
cheese. Germany can produce one watch at a cost of 100 pounds of cheese. Which of the
following is true?
a. The opportunity cost of producing watches is lower in Switzerland.
b. The opportunity cost of producing cheese is lower in Switzerland.
c. The opportunity cost of producing watches is the same in both countries.
d. It is impossible to compare costs because the two countries are not the same size.
e. In Germany, the cost of a pound of cheese is one watch.
Answer: A
39) If Canada can produce 500 TV sets at the cost of 10 cars, while Mexico can produce
1,000 TV sets at the cost of 8 cars, we know the following:
a. Canada has a comparative advantage in TV production.
b. Mexico has the absolute advantage in TV production.
c. The two countries' joint output equals 1,500 TV sets and 18 cars without trade, but it will
be higher after proper specialization and trade.
d. Canada has a comparative advantage in car production.
e. Canada produces more cars than Mexico does.
Answer: D
40) Given an opportunity cost of 10 bicycles per 1 sewing machine in Germany and 20
bicycles per 2 sewing machines in Hungary,

a. Neither country has a comparative advantage in the production of either good.
b. Germany has a comparative advantage in the production of sewing machines.
c. Germany has an absolute advantage in the production of sewing machines.
d. Hungary has an absolute advantage in the production of bicycles.
e. Hungary produces more bicycles than Germany does.
Answer: A
41) If 50 units of resources can produce either 1 ton of sugar beets or 100 lb. of ham in
Germany, while 90 units of resources can produce either 2 tons of sugar beets or 300 lb. of
ham in Poland,
a. Poland has a comparative advantage in producing both goods
b. Germany has a comparative advantage in producing sugar beets
c. neither country has an absolute advantage in producing sugar beets, but Poland has an
absolute advantage in producing ham
d. Germany can produce more ham than Poland can
e. mutually beneficial international trade is not possible
Answer: B
42) International trade based on the concept of comparative advantage allows trading partners
to be better off than if they did not trade.
a. True
b. False
Answer: A
43) If countries begin to specialize according to comparative advantage, a more efficient use
of resources occurs. As a result, the world output of at least one good increases, with no
decrease in the output of any other good.
a. True
b. False
Answer: A
44) International trade
a. reduces world output of goods and services
b. lowers economic efficiency
c. allows countries to specialize in producing particular products
d. creates opportunity cost differentials in production

e. shifts each economy's production possibilities frontier inward
Answer: C
Figure 16-4
Number of workers needed to produce one unit of each of the following goods:

45) In Figure 16-4, which of the following is true?
a. Gains from trade are possible if Korea produces radios and Colombia produces calculators.
b. No gains from trade are possible since neither country has an absolute advantage in
producing both radios and calculators.
c. Gains from trade are not possible if Korea produces calculators and Colombia produces
radios.
d. No trade will occur because neither country has a comparative advantage in producing
either good.
e. No trade will occur because neither country has a comparative advantage in producing both
radios and calculators.
Answer: A
46) Suppose the opportunity cost is a constant 500 TV sets for 1 car in Canada and 1,000 TV
sets for 8 cars in Mexico. Then, if both countries specialize in accordance with their
comparative advantage, the production of 1,000 extra TV sets in one country and 1,000 fewer
TV sets in the other would imply that the world as a whole can have
a. 2 more cars
b. 6 more cars
c. 8 more cars
d. 125 more cars
e. 500 more cars
Answer: B
47) If free international trade opens up and a country has a comparative disadvantage in sugar
production, we should expect
a. greater sugar consumption in that country
b. higher sugar prices in that country
c. greater sugar production in that country
d. lower sugar prices in sugar-exporting countries

e. greater sugar consumption in sugar-exporting countries
Answer: A
48) A nation should only import those goods for which it has
a. lower opportunity costs than its trading partner
b. higher opportunity costs than its trading partner
c. zero transaction costs
d. lower costs of production than its trading partner
e. absolute advantage in production compared to its trading partner
Answer: B
Figure 16-5
Quantities of goods that can be produced in one day with available resources:

49) In Figure 16-5, which of the following is true?
a. Both countries can benefit from trade if Panama produces bicycles and Costa Rica
produces rugs.
b. Both countries can benefit from trade if Panama produces both rugs and bicycles.
c. Both countries can benefit from trade if Panama produces rugs and Costa Rica produces
bicycles.
d. Both countries can benefit from trade if Costa Rica produces bicycles and rugs.
e. Neither country can benefit from trade since Panama has an absolute advantage in
producing both bicycles and rugs.
Answer: A
50) If Country A can produce a good at a lower opportunity cost than Country B can,
a. there are benefits from trade
b. Country A has an absolute advantage in producing the good
c. economic efficiency has been achieved
d. Country A does not have a comparative advantage in producing the good
e. Country A can sell the good for a higher price abroad
Answer: A
51) When nations trade according to their comparative advantages,

a. one nation has an absolute advantage in producing all goods
b. all opportunity costs of production are the same
c. world economic efficiency falls
d. at least one country is made better off through trade
e. at least one country is made worse off through trade
Answer: D
52) Mutually beneficial trade between two countries is possible only as long as
a. unit costs of production are the same no matter how many units are being produced
b. marginal costs rise as production increases
c. marginal costs are equal to average total costs
d. one country has an absolute advantage in the production of one good, while the other
country enjoys a similar advantage in making another good
e. one country has a comparative advantage in the production of one good, while the other
country enjoys a comparative advantage in making another good
Answer: E
53) The limits of the terms of trade between two countries are determined by those countries'
opportunity costs of production.
a. True
b. False
Answer: A
54) If Armenia can produce two rugs or 100 spy novels in an hour, and Turkey can produce
one rug or 50 spy novels in an hour,
a. the terms of trade are 50 spy novels per rug, and Turkey should produce both rugs and spy
novels
b. the terms of trade are 50 spy novels per rug, and Turkey should produce only rugs
c. the terms of trade are 50 spy novels per rug, and Armenia should produce only rugs
d. there are no gains from trade
e. the terms of trade are will exceed 50 spy novels per rug, and Armenia should produce both
rugs and spy novels
Answer: D
55) The ratio (in physical units) at which two countries trade goods is known as the
a. opportunity cost

b. marginal social cost
c. price to earnings ratio
d. comparative advantage ratio
e. terms of trade
Answer: E
56) The terms of trade
a. equal the ratio of opportunity costs of production in two countries
b. equal the ratio of marginal production costs in two countries
c. is the quantity of one good that is exchanged for one unit of another good
d. are determined by absolute advantage
e. equal the ratio of average production costs in two countries
Answer: C
57) The terms of trade
a. equal the equilibrium price in a competitive market
b. equal a nation's imports minus its exports
c. determine whether specialization according to comparative advantage is economically
rational
d. are equal to 1.0 in market equilibrium
e. determine how the gains from international trade are distributed among countries
Answer: E
58) The opportunity costs of production in two countries engaged in trade
a. determine which country has an absolute advantage
b. influence their domestic inflation rates
c. lead to a higher level of economic efficiency
d. create shifts of the production possibilities frontiers (PPF's) of both nations
e. define the limits of the terms of trade
Answer: E
59) The cost of producing a car in Germany is 2,000 bushels of wheat, and the cost of
producing a car in Canada is 1,200 bushels of wheat. The two countries can both benefit if
the terms of trade are
a. greater than 2,000 of wheat per car

b. less than 1,200 bushels of wheat per car
c. between 1,200 bushels and 2,000 bushels of wheat per car, and Germany produces wheat
d. between 1,200 bushels and 2,000 bushels of wheat per car, and Germany produces cars
e. between 1,200 bushels and 2,000 bushels of wheat per car, and Canada produces wheat
Answer: C
60) Suppose that the opportunity cost of producing a rocking chair in Mexico is 50
basketballs and the opportunity cost of a rocking chair in Japan is 80 basketballs. Japan and
Mexico can realize mutual gains if the terms of trade are
a. greater than 80 basketballs per rocking chair, and Japan produces rocking chairs
b. between 50 and 80 basketballs per rocking chair, and Japan produces basketballs
c. greater than 80 basketballs per rocking chair, and Mexico produces basketballs
d. less than 50 basketballs per rocking chair, and Japan produces basketballs
e. between 50 and 80 basketballs per rocking chair, and Japan produces rocking chairs
Answer: B
61) Assume that Chile can produce one pound of coffee or 40 pillows in an hour, and that the
United States can produce one pound of coffee or 20 pillows in an hour,
a. the terms of trade should be between 20 and 40 pillows per pound of coffee, and the United
States should produce both coffee and pillows
b. the terms of trade should be between 20 and 40 pillows per pound of coffee, and Chile
should produce pillows
c. the terms of trade should be between 20 and 40 pillows per pound of coffee, and Chile
should produce coffee
d. the terms of trade should exceed 40 pillows per pound of coffee, and Chile should produce
coffee
e. no trade will occur, since the United States does not have an absolute advantage in
producing either good
Answer: B
62) Assume that Canadian firms can produce one automobile or 1,000 calculators per day,
and that U.S. firms can produce three automobiles or 6,000 calculators per day. The terms of
trade should be between
a. 1,000 and 2,000 calculators per automobile, and the U.S. should produce both calculators
and automobiles
b. 1,000 and 6,000 calculators per automobile, and the U.S. should produce automobiles
c. 1,000 and 6,000 calculators per automobile, and the U.S. should produce calculators

d. 1,000 and 2,000 calculators per automobile, and the U.S. should produce automobiles
e. 1,000 and 2,000 calculators per automobile, and Canada should produce automobiles
Answer: E
63) If the opportunity cost of a television set equals 20 cameras in China, but 10 cameras in
Japan, then we know
a. all of the following
b. that China has a comparative advantage in producing cameras
c. that Japan has a comparative advantage in producing TV sets
d. that Japan may well have an absolute disadvantage in producing both goods
e. that market exchange of 1 TV set for 15 cameras would produce not only mutually
beneficial trade, but would also split the gains from trade equally between the two countries
Answer: A
64) Which of the following factors does not help explain incomplete specialization by
countries that trade in accordance with comparative advantage?
a. There may be high transportation costs for perishable products or human services.
b. The economies of trading partners may be of vastly different sizes.
c. Opportunity costs of production may not be constant, but may vary with the volume of
production.
d. Governments may impose all kinds of barriers to free international trade, such as tariffs
and quotas.
e. The cost of making trade deals may have become extremely low because of the existence
of the World Trade Organization.
Answer: E
65) If the opportunity cost of production rises as more of a good is produced,
a. the terms of trade will be independent of opportunity costs
b. the production possibilities curve will be a straight line
c. a country will specialize in producing only those goods in which it has a comparative
advantage
d. a country should produce any good in which it has an absolute advantage
e. a country may not specialize completely in the goods in which it has comparative
advantage
Answer: E
66) If there are high transportation costs

a. the terms of trade will also be high
b. the result could be incomplete specialization
c. large countries will have an advantage in trading with small countries
d. small countries will have an advantage in trading with large countries
e. trade will be based on absolute advantage rather than comparative advantage
Answer: B
67) One factor that might lead to reduced trade or incomplete specialization is
a. absolute advantage
b. comparative advantage
c. government-enacted barriers to trade
d. constant opportunity cost
e. decreasing opportunity cost
Answer: A
68) If countries have different resource endowments, trade is usually not possible.
a. True
b. False
Answer: B
69) Differences in climate among nations
a. could lead to economic efficiency
b. reduce opportunities for gains from international trade
c. lower the terms of trade in favor of warm-climate nations
d. may create opportunities for international trade
e. raise the terms of trade in favor of warm-climate nations
Answer: D
70) A nation's comparative advantage
a. can almost always be traced to its natural resources
b. is often based on its natural resources
c. is often based on barriers to international trade
d. is reflected in the shape of its demand curve for imported goods
e. is a result of increasing marginal returns

Answer: B
71) Once a nation has been producing a good or service for some time,
a. its supply curve for that product is vertical
b. its supply curve for that product is horizontal at the world price
c. it often develops a comparative advantage in producing that good or service
d. its moves along its production possibilities frontier and produces more of it
e. its production possibilities frontier shifts outward
Answer: C
72) A country that has relatively large amounts of a particular resource at its disposal
a. will tend to have an absolute advantage
b. will trade the resource for some good in which that country has an absolute advantage
c. will tend to have a comparative advantage in goods that make heavy use of that resource
d. will trade the resource for some good in which that country has a comparative advantage
e. will tend to have a low exchange rate
Answer: C
73) Objections to free trade
a. often come from those who are harmed by trade
b. make no sense because everyone benefits from trade
c. usually arise outside of the United States
d. are not economically rational
e. reflect a lack of understanding of the benefits of international trade
Answer: A
74) Objections to free trade
a. arise because trade harms everyone
b. arise when some groups within a nation are harmed by trade
c. arise because importers and exporters are often the same people
d. are inconsistent with economic rationality
e. arise because people prefer not to consume foreign-produced goods
Answer: B
75) When a nation begins to export a good,

a. the domestic price of that good falls
b. less of that good is produced domestically
c. the domestic producers are made better off
d. the domestic consumers are made better off
e. both domestic and foreign consumers will purchase more of it
Answer: C
76) If a nation begins to export a good,
a. the domestic price of that good will decrease
b. that country will typically erect barriers to trade
c. domestic producers of the good will be harmed
d. domestic consumers of the good will be harmed
e. both domestic consumers and domestic producers will benefit
Answer: D
77) If a country begins to import a good,
a. it has a comparative advantage in producing that good
b. it has a comparative advantage in consuming that good
c. domestic consumers are made better off
d. domestic producers are made better off
e. both domestic consumers and domestic producers are harmed
Answer: C
78) When a nation begins to import a good,
a. the domestic price of that good will fall
b. domestic consumers are harmed
c. the domestic price of that good will rise
d. domestic producers benefit
e. the quantity produced domestically will rise
Answer: A
79) Which of the following statements correctly describes international trade in accordance
with comparative advantage?
a. Trade is impossible unless there exists a purely competitive market for foreign exchange.

b. Trade makes all the citizens of the trading countries better off, which is a clear example of
a Pareto improvement.
c. Trade may well make some citizens in each trading country worse off.
d. Trade requires the judicious application by government of tariffs and quotas in order to
discourage production according to comparative disadvantage.
e. Trade requires that the economies of the trading partners be of roughly equal size (United
States versus Andorra just does not work).
Answer: C
80) Which of the following correctly describes free international trade in accordance with
comparative advantage?
a. It is typically favored by producers in importing countries.
b. It is typically favored by producers in exporting countries, but hated by their workers.
c. It is typically favored by producers in exporting countries, including their workers.
d. It is typically hated by consumers in importing countries.
e. It is typically hated by farmers, but looked upon favorably by manufacturers.
Answer: C
81) When free international trade takes place, in accordance with a country's comparative
advantage,
a. producers in export industries are likely to favor it because they sell a larger quantity at
identical prices
b. producers in export industries are likely to oppose it because they sell a larger quantity,
which lowers prices in accordance with the laws of supply and demand
c. producers in import industries are likely to favor it because they sell a larger quantity at
only slightly depressed prices
d. export industry workers are likely to favor it, import industry workers are likely to hate it
e. consumers are likely to be of two minds: they hate the more expensive import goods, but
they love the cheaper export goods
Answer: D
82) Politically, one reason trade restrictions are common is that
a. the many beneficiaries of free trade each gain a small amount whereas the few losers, lose
enough to lobby for restrictions.
b. the beneficiaries of free trade collectively gain a small amount whereas the few losers,
collectively lose much more.
c. the few beneficiaries of free trade each gain a large amount and the many losers, lose
enough to lobby for restrictions.

d. foreign corporations bribe politicians.
Answer: A
83) One reason why there may be a bias against free trade is that
a. transportation costs are too high
b. absolute advantage may outweigh comparative advantage
c. those who benefit from trade have little incentive to lobby for it
d. the terms of trade may be too high
e. people prefer importing to exporting
Answer: C
84) One reason why there may be a bias against free trade is that
a. those harmed by trade have a powerful incentive to lobby against it
b. people prefer domestically-produced goods to foreign-produced goods
c. people prefer foreign-produced goods to domestically-produced goods
d. the terms of trade are too low
e. the exchange rate is too high
Answer: A
85) Tariffs are government policies designed to encourage international trade.
a. True
b. False
Answer: B
86) A tariff is
a. a law restricting the quantity of a good that may be imported
b. a tax imposed on imports
c. a penalty imposed on consumers for supplying goods to a market
d. the terms of trade between two nations
e. the ratio of opportunity costs in two nations
Answer: B
87) Tariffs
a. benefit consumers by lowering prices
b. harm producers by decreasing competition in the product market

c. harm consumers by increasing the quantity of goods available
d. skew the terms of trade in favor of importing nations
e. benefit domestic producers because they can charge higher prices and sell more output
Answer: E
88) If Japan imposes a tariff on shoes from Argentina, then
a. the price of Argentinean shoes sold in Japan will fall
b. the quantity of Argentinean shoes sold in Japan will rise
c. Japanese shoe producers will benefit
d. Japanese consumers will benefit from lower prices for Japanese shoes
e. Japanese consumers will benefit from lower prices for Argentinean shoes
Answer: C
89) If free international trade is compromised by the imposition of an import quota or tariff,
a. all of the following are true
b. import-competing producers in the country that imposes the tariff or quota will be able to
sell a larger quantity at higher prices
c. consumers of import goods will obtain a larger quantity at lower prices
d. workers in export industries will find more jobs
e. consumers of export goods will obtain a larger quantity, although only at higher prices
Answer: B
90) A tax that is imposed on each unit of an imported good is known as a(n)
a. quota
b. ad valorem quota
c. implicit quota
d. tariff
e. subsidy
Answer: D
91) A tariff
a. is usually set by domestic producers of a good
b. can be either a fixed dollar amount or a percentage of a good's value
c. decreases domestic price for a good, holding all else constant
d. improves economic efficiency in the importing nation

e. improves economic efficiency in the exporting nation
Answer: B
92) Both tariffs and quotas
a. benefit domestic consumers by lowering prices
b. benefit domestic consumers by expanding consumption choices
c. are illegal in the United States
d. benefit domestic producers
e. are policy tools that help bring about free trade
Answer: D
93) A quota decreases the volume of imports, whereas a tariff typically has no impact on the
volume of imports.
a. True
b. False
Answer: B
94) A quota typically increases the volume of imports, whereas a tariff typically decreases the
volume of imports.
a. True
b. False
Answer: B
95) Economists generally oppose trade restrictions such as tariffs and quotas; however, if one
these devices must be used, economists generally prefer tariffs to quotas.
a. True
b. False
Answer: A
96) A quota is a
a. tax imposed on each unit of an exported good
b. tax imposed on each unit of an imported good
c. change in the terms of trade between two nations
d. result of opportunity cost differentials between two nations
e. restriction on the quantity of a good that may be imported
Answer: E

97) An effective import quota will
a. increase the revenue received by the exporting nation
b. eliminate all incentives for trade between nations
c. reduce the quantity demanded of the imported good
d. lead to a lower domestic price
e. lead to a higher price in the exporting nation
Answer: C
98) One advantage of a tariff over a quota, from the perspective of the nation imposing it, is
that a tariff
a. decreases the domestic price
b. increases the foreign price
c. increases the quantity of imports
d. decreases the quality of imports
e. raises tax revenue
Answer: E
99) Which of the following statements about quotas is correct?
a. They benefit domestic consumers through lower prices.
b. They benefit domestic producers through higher prices.
c. They raise world output.
d. They cause outward shifts in the domestic and foreign production possibilities frontiers.
e. They benefit domestic producers through increased competition that stimulates innovation.
Answer: B
100) Protectionism arises because
a. people misunderstand the benefits of free trade
b. trade generally harms some groups in society
c. the costs of free trade outweigh the benefits for all groups in society
d. the costs of trade for both exporting and importing nations outweigh the benefits
e. of a lack of comparative advantage
Answer: B
101) Protectionism is
a. the belief that a nation's industries should be protected from foreign competition

b. the belief that a nation's consumers should be protected from foreign competition
c. based on the idea that economies of scale are important
d. consistent with absolute advantage, but not with comparative advantage
e. the favored approach of pro-trade groups
Answer: A
102) A high-wage country cannot afford free trade with a low-wage country. The high- wage
country will either be undersold or its workers will be forced to accept lower living standards.
a. True
b. False
Answer: B
103) A low-productivity country will tend to avoid free trade with a high-productivity
country. The low-productivity country will be exploited and lose industries in which it has a
comparative advantage.
a. True
b. False
Answer: B
104) Trade restrictions have been defended on the grounds that they
a. raise prices domestically and thus benefit consumers
b. increase imports
c. lower prices domestically and thus benefit consumers
d. decrease product quality in domestic markets
e. protect domestic infant industries
Answer: E
105) The infant industry argument
a. is that governments should protect all industries for the first five years of existence
b. is that governments should protect a new industry until it can "stand on its own feet"
c. defends quotas on products produced by infant industries abroad
d. has been used to justify protection of strategically important industries
e. explains why some less developed countries export raw materials
Answer: B
106) Strategic trade policy

a. argues for protecting certain industries that benefit society but that may not thrive in a free
trade environment
b. advocates quotas on imports of high-tech products
c. defends the use of tariffs to protect monopolistically competitive industries
d. has been used to justification protection of infant industries
e. explains why less developed countries export more raw materials than services
Answer: A
107) The United States does not impose tariffs or quotas; however, many of its trading
partners do have these trade restrictions.
a. True
b. False
Answer: B
108) U.S. imports of sugar
a. have been illegal since the mid-1980s
b. harm U.S. sugar producers
c. increase the U.S. government's revenue
d. are restricted by tariffs
e. are restricted by import quotas
Answer: E
109) The United States imposes a quota on sugar imports
a. because sugar is considered unhealthy
b. because sugar cannot be produced in the U.S.
c. to avoid having to pay billions of dollars annually to support domestic sugar prices
d. to avoid having to pay billions of dollars annually to support foreign sugar prices
e. because a tariff would not be efficient
Answer: A
Figure 16-6
Number of workers needed to produce one unit of each of the following goods:

110) According to Figure 16-6, which of the following statements is correct?
a. Chile has the both the absolute and comparative advantage in the production of bicycles.
b. India has both the absolute and comparative advantage in the production of bicycles.
c. Chile has the absolute advantage in the production of wagons but India has the comparative
advantage.
d. India has the absolute advantage in the production of bicycles but Chile has the
comparative advantage.
e. India has the absolute advantage in the production of wagons but Chile has the comparative
advantage.
Answer: A
111) According to Figure 16-6, all of the following statements are correct except
a. Chile has the absolute advantage in the production of bicycles
b. Chile has the comparative advantage in the production of bicycles
c. India has the comparative advantage in the production of bicycles
d. India has the absolute advantage in the production of wagons
e. India has the comparative advantage in the production of wagons
Answer: C
112) In an Israeli factory, each worker can produce 2/5 of a shirt in an hour or 1/3 of a pair of
pants in an hour. If there are 500 workers in the factory, then the maximum number of shirts
that can be made in an hour is
a. 100
b. 200
c. 50
d. 250
e. 300
Answer: B
113) In an Israeli factory, each worker can produce 2/5 of a shirt in an hour or 1/4 of a pair of
pants in an hour. If there are 500 workers in the factory, then the maximum number of pairs
of pants that can be made in an hour is

a. 120
b. 250
c. 75
d. 350
e. 300
Answer: B
114) In an Israeli factory, each worker can produce 2/5 of a shirt in an hour or 1/10 of a pair
of pants in an hour. If there are 500 workers in the factory, what is opportunity cost of
producing one shirt?
a. 1 pair of pants
b. 4 pairs of pants
c. 1/2 pair of pants
d. 1/4 pair of pants
e. 2 pairs of pants
Answer: D
115) In an Israeli factory, each worker can produce 2/5 of a shirt in an hour or 1/10 of a pair
of pants in an hour. If there are 500 workers in the factory, what is opportunity cost of
producing one pair of pants?
a. 1 shirt
b. 4 shirts
c. 1/2 shirt
d. 1/4 shirt
e. 2 shirts
Answer: B
116) If Egypt can produce 3 silver candlesticks or 120 small silver cups in an hour and
Turkey can produce 4 silver candlesticks or 160 small silver cups in an hour then
a. neither country would gain by trading
b. the terms of trade or 40 silver cups per one silver candlestick and Egypt should only
produce silver cups.
c. the terms of trade or 40 silver cups per one silver candlestick and Turkey should only
produce silver cups.
d. the terms of trade or 40 silver cups per one silver candlestick and Egypt should only
produce candlesticks.

e. the terms of trade or 40 silver cups per one silver candlestick and Turkey should only
produce candlesticks.
Answer: A
117) If Canada began to export maple syrup to Australia, which of the following will happen?
a. The price of maple syrup in Australia will increase and Australian consumers will be made
worse off.
b. The price of maple syrup in Australia will decrease and the Australian consumers will be
made better off.
c. The price of maple syrup in Canada will decrease and the Canadian consumers will be
made better off.
d. The price of maple syrup in Canada will increase and the Canadian consumer will be made
worse off.
e. The price of maple syrup in Canada will decrease and the Canadian consumer will be made
worse off.
Answer: D
118) If Country A exports a good to Country B, the prices of the good in Country A will
______ and the prices of the good in Country B will ________.
a. increase; increase
b. decrease; decrease
c. increase; decrease
d. decrease; increase
e. stay the same; increase
Answer: C
119) If Country A exports a good to Country B, who is made better off?
a. The producers in Country A and the consumers in Country B
b. The consumers in Country A and the consumers in Country B
c. The producers in Country A and the producers in Country B
d. The consumers in Country A and the producers in Country B
e. Only the consumers in Country A will benefit from this trade agreement
Answer: A
120) If Country A exports a good to Country B, who is made worse off?
a. The producers in Country A and the consumers in Country B
b. The consumers in Country A and the consumers in Country B

c. The producers in Country A and the producers in Country B
d. The consumers in Country A and the producers in Country B
e. Only the consumers in Country A will be worse off from this trade agreement
Answer: D

Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056

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