Macroeconomics 201 E1
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Recall Chapter 1's opening story about the British sea captains and the convicted felons. In what way were incentives used to solve the problem of the high mortality rate on board the ships?
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Payment (to ship captains) was to be offered for each prisoner that was taken aboard the ships.
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Payment (to ship captains) was made independent of the regulations passed for prisoner welfare.
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Regulations were passed so that prisoners could get better food, water, and medical care.
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Payment (to ship captains) was made dependent on the survival rate of prisoners.
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Macroeconomics 201 E1 explores the impact of incentive structures on behavior through historical and contemporary examples, assessing understanding of economic principles and their applications.
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- 2.
Recall Chapter I's opening story about the British sea captains and the convicted felons. Instead of paying the sea captains for each prisoner placed on board the ships in Great Britain, an economist suggested:
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Paying for each prisoner who walked off the ship in Australia.
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Paying for food and water to reduce costs of caring for prisoners during the transit.
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Doing nothing, since the suggested change would not matter.
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That new regulations be passed to require prisoner safety and health.
Correct Answer
A. Paying for each prisoner who walked off the ship in Australia.Explanation
The economist suggested paying for each prisoner who walked off the ship in Australia as a way to incentivize the sea captains to ensure that the prisoners safely arrived at their destination. This would create a financial motivation for the captains to take proper care of the prisoners during the transit, reducing the risk of deaths or injuries. By linking payment to the successful arrival of prisoners in Australia, the economist proposed a solution that would align the interests of the sea captains with the goal of safely transporting the convicts.Rate this question:
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- 3.
In several cities around the country, schools are paying cash awards to students who do well on English and Math tests. This practice highlights the idea of:
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Pedagogical economics the continuous assessment of student performance in an effort to maximize student efficiency.
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Hidden costs—the costs borne by taxpayers in the form of wasteful school spending.
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Incentives the rewards and penalties that motivate behavior.
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Screening theory—the identification of individuals or groups based on various performance measures.
Correct Answer
A. Incentives the rewards and penalties that motivate behavior.Explanation
The practice of schools paying cash awards to students who do well on English and Math tests is an example of incentives. Incentives are rewards and penalties that are used to motivate behavior. In this case, the cash awards serve as a reward for students to perform well on tests. By providing an incentive, schools are hoping to encourage students to put in more effort and achieve better results in their academic performance. This practice is based on the belief that rewards can motivate behavior and improve student efficiency.Rate this question:
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- 4.
The basic postulate of economics indicates that changes in incentives influence the:
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Actions of producers but not consumers.
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Actions of consumers but not producers.
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Choices of individuals only when they buy and sell goods in the marketplace.
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Choices of individuals with regard to a wide range of activities, including those generally perceived as social or political.
Correct Answer
A. Choices of individuals with regard to a wide range of activities, including those generally perceived as social or political.Explanation
The basic postulate of economics suggests that changes in incentives affect the choices made by individuals in various aspects of their lives, not just limited to buying and selling goods in the marketplace. This means that incentives can influence decisions related to social or political activities as well.Rate this question:
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- 5.
Which financing method for transporting prisoners from point A to B will result in the greatest number of prisoners surviving the trip? Assume there are 50 prisoners being transported.
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The ship's captain is paid $100 by the government for every live prisoner that is loaded on board at Point A.
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The ship's captain is paid $100 by the government for every live prisoner that is unloaded at Point B.
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The ship's captain is paid $400 by the government for every live prisoner that is loaded on board at Point A.
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The ship's captain is paid a flat rate of $3,000 for the trip, rather than being paid per prisoner.
Correct Answer
A. The ship's captain is paid $100 by the government for every live prisoner that is unloaded at Point B.Explanation
The financing method that will result in the greatest number of prisoners surviving the trip is when the ship's captain is paid $100 by the government for every live prisoner that is unloaded at Point B. This incentivizes the captain to ensure the safety and well-being of the prisoners throughout the journey, as their survival directly affects the captain's payment. The captain will be motivated to take necessary precautions and provide appropriate care to maximize the number of prisoners who make it to Point B alive.Rate this question:
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- 6.
Many companies pay their sales employees based on commissions—the more they sell, the more they get paid. This practice highlights the role of:
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Marginal thinking.
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Incentives.
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Trade-offs.
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Sunk costs.
Correct Answer
A. Incentives.Explanation
In this scenario, the practice of paying sales employees based on commissions serves as an incentive for them to sell more. By offering a financial reward tied to their sales performance, companies motivate their salespeople to work harder and achieve higher sales numbers. This aligns with the concept of incentives, which refers to rewards or punishments that influence behavior and decision-making.Rate this question:
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- 7.
Based on the ideas of Adam Smith, it is--------- dentists clean and repair teeth, but
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Not out of benevolence that; from their regard for their own self-interest
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Out of benevolence that; sometimes from their regard for their own self-interest
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Not out of self-interest that; out of their benevolence
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From charity and good will that; only if they can charge high prices
Correct Answer
A. Not out of benevolence that; from their regard for their own self-interestExplanation
Adam Smith's ideas, as expressed in his book "The Wealth of Nations," emphasize the role of self-interest in economic activities. According to Smith, individuals pursue their own self-interest in order to maximize their own welfare. In the context of dentists cleaning and repairing teeth, the correct answer suggests that dentists do not do so out of benevolence or altruism, but rather because it is in their own self-interest. Dentists provide these services in order to earn a living and maximize their own financial well-being.Rate this question:
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- 8.
When markets don't align self-interest with social interest:
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Markets will still manage to reach an efficient outcome.
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Governments may improve the situation by changing incentives.
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Societal costs will always exceed individual benefits.
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Individual benefits will exceed societal benefits.
Correct Answer
A. Governments may improve the situation by changing incentives.Explanation
When markets don't align self-interest with social interest, it means that individual actions that benefit oneself may not necessarily benefit society as a whole. In such cases, markets may still manage to reach an efficient outcome, but governments can play a role in improving the situation by changing incentives. By altering the incentives, governments can encourage individuals and businesses to consider the social costs and benefits of their actions, leading to a more socially desirable outcome.Rate this question:
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- 9.
Self-interest can be aligned with the social interest by:
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The enactment of government policies that increase incentives to work and trade.
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Increasing international trade.
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Promoting benevolence.
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Banning free markets by the government.
Correct Answer
A. The enactment of government policies that increase incentives to work and trade.Explanation
Self-interest refers to individuals' pursuit of their own personal goals and desires, while social interest refers to the overall well-being and benefit of society as a whole. The enactment of government policies that increase incentives to work and trade can align self-interest with social interest by encouraging individuals to engage in productive activities that contribute to the economy and the overall welfare of society. By providing incentives such as tax breaks, subsidies, or job creation programs, the government can motivate individuals to work and trade, leading to economic growth and societal progress. This approach promotes a win-win situation where individuals pursue their self-interest while also benefiting society.Rate this question:
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- 10.
Which of the following is an example of self-interest that attempts to promote the public interest?
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A mother prevents her children from becoming vaccinated against measles, mumps, and rubella because of fears of autism.
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The President of the United States restricts American consumers from buying foreign-made products.
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The New York Yankees beat the Boston Red Sox.
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An entrepreneur risks his life savings to open up a grocery store in an underserved area.
Correct Answer
A. An entrepreneur risks his life savings to open up a grocery store in an underserved area.Explanation
The correct answer is an example of self-interest that attempts to promote the public interest because the entrepreneur is taking a personal risk by investing their life savings to open a grocery store in an underserved area. By doing so, they are providing a service to the community and addressing a need, which benefits the public.Rate this question:
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- 11.
Most people do not buy the safest car they can find. Why not?
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Other factors matter besides safety, such as comfort, cost, and fuel economy.
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People do not take the time to understand the safety features of cars.
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Consumers are unaware of the risks of different cars.
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The statement is false. People do buy the safest car they can find.
Correct Answer
A. Other factors matter besides safety, such as comfort, cost, and fuel economy.Explanation
People do not buy the safest car they can find because other factors also play a significant role in their decision-making process. These factors include comfort, cost, and fuel economy. While safety is important, individuals may prioritize other aspects when choosing a car.Rate this question:
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- 12.
Air travel from Chicago to Los Angeles costs $800 and takes four hours. A bus ticket between the cities costs $100 and takes 104 hours. Other things constant, the minimum value of one's time that would induce a rational individual to fly rather than drive would be:
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$1 per hour.
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$7 per hour.
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$12 per hour.
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$120 per hour.
Correct Answer
A. $7 per hour.Explanation
The minimum value of one's time that would induce a rational individual to fly rather than drive can be determined by comparing the time and cost differences between the two modes of transportation. The flight takes 4 hours, while the bus takes 104 hours, resulting in a time difference of 100 hours. The cost difference is $800 for the flight and $100 for the bus, resulting in a cost difference of $700. To calculate the minimum value of one's time, we divide the cost difference by the time difference, which gives us $7 per hour. Therefore, a rational individual would choose to fly rather than drive if their time is valued at $7 per hour or more.Rate this question:
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- 13.
A grocery store is running a "buy-one-get-another-at-one-half-off' promotion on a dozen doughnuts. So the first dozen is $6 and the second would be $3. A person would buy the second dozen if their marginal benefit from the second dozen doughnuts is:
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Greater than $3
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Greater than $6
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Greater than $9
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Less than $3
Correct Answer
A. Greater than $3Explanation
If a person's marginal benefit from the second dozen doughnuts is greater than $3, it means that they value the additional doughnuts at more than $3. In this case, they would be willing to pay the discounted price of $3 for the second dozen, making it a good deal for them. If their marginal benefit was less than $3, it would not be worth it for them to purchase the second dozen at that price.Rate this question:
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- 14.
One benefit of trade is that it:
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Increases the division of knowledge because trade makes people more self-sufficient, producing more of what they consume.
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Allows for increased specialization and mass-production techniques that lower per unit costs of production.
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Lowers productivity, leading to greater domestic employment.
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Decreases economies of scale, making production more efficient.
Correct Answer
A. Allows for increased specialization and mass-production techniques that lower per unit costs of production.Explanation
Trade allows for increased specialization and mass-production techniques that lower per unit costs of production. This is because trade allows countries to focus on producing goods and services that they have a comparative advantage in, meaning they can produce these goods more efficiently and at a lower cost compared to other countries. As a result, countries can specialize in producing certain goods and then trade them with other countries, leading to increased efficiency and lower production costs. This specialization and mass-production can lead to economies of scale, further reducing costs and making production more efficient.Rate this question:
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- 15.
Which of the following statements is TRUE about trade?
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Everyone can benefit from trade, even people who trade with someone from a foreign country.
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Comparative advantage is based on specializing in products that have a high opportunity cost of production.
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If a person can do everything better than anyone else, there is no reason for that person to trade with others.
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Trade makes one party better off but the other party worse off, so there is no net gain to society.
Correct Answer
A. Everyone can benefit from trade, even people who trade with someone from a foreign country.Explanation
Trade is beneficial for everyone, including those who engage in trade with individuals from other countries. This is because trade allows for the exchange of goods and services, which leads to increased efficiency, specialization, and access to a wider range of products. By engaging in trade, individuals can obtain goods and services that they may not be able to produce themselves, leading to increased welfare and overall economic growth. Therefore, the statement that everyone can benefit from trade, even people who trade with someone from a foreign country, is true.Rate this question:
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- 16.
As the United States becomes more productive at manufacturing chemicals and pharmaceutical drugs, the opportunity cost of producing other items such as textiles-------- , leading to------ demand for foreign textiles.
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Increases; increased
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Decreases; increased
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Increases; decreased
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Decreases; decreased
Correct Answer
A. Decreases; increasedExplanation
As the United States becomes more productive at manufacturing chemicals and pharmaceutical drugs, the opportunity cost of producing other items such as textiles decreases. This means that the United States is giving up fewer resources to produce textiles, making it less costly for them to produce. As a result, the demand for foreign textiles increases because they are now relatively cheaper compared to domestically produced textiles.Rate this question:
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- 17.
EBay creates value by:
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Helping sellers trick buyers into purchasing broken items.
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Moving goods like broken laser pointers from people who don't want them to people who do.
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Helping people with the same preferences find each other.
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Moving toys from children who want them to children who don't.
Correct Answer
A. Moving goods like broken laser pointers from people who don't want them to people who do.Explanation
eBay creates value by facilitating the exchange of goods between individuals who have different preferences. In this case, eBay helps in moving broken laser pointers from people who no longer want them to people who are interested in purchasing them. By providing a platform for sellers to connect with buyers, eBay enables the efficient redistribution of goods, allowing individuals to find value in items that others may consider unwanted or no longer useful.Rate this question:
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- 18.
Which of the following situations would lead to more starvation?
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A world where everyone grows his or her own food and there is no trade
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A world with trade and lots of specialization
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A world with immense division of knowledge
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A world where only some people specialize in food and everyone else produces something else
Correct Answer
A. A world where everyone grows his or her own food and there is no tradeExplanation
In a world where everyone grows their own food and there is no trade, there would be limited access to a variety of food sources. This would lead to more starvation because individuals would only have access to the food they are able to grow themselves, which may not be sufficient to meet their nutritional needs. Additionally, without trade, there would be no opportunity to exchange surplus food with others, further exacerbating the problem of food scarcity.Rate this question:
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- 19.
Specialization and trade can --------- the per-unit cost of production because ---------
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Decrease; it allows for more small-scale production.
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Decrease; it creates economies of scale associated with large-scale production
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Increase; it requires more expensive, specialized equipment
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Increase; more expensive labor is needed.
Correct Answer
A. Decrease; it creates economies of scale associated with large-scale productionExplanation
Specialization and trade can decrease the per-unit cost of production because it creates economies of scale associated with large-scale production. When production is specialized, each worker or firm can focus on a specific task or product, leading to increased efficiency and productivity. This specialization allows for the utilization of specialized machinery and equipment, which can be more cost-effective when used in large quantities. As a result, the cost per unit of production decreases, leading to lower overall costs for the goods or services being produced.Rate this question:
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- 20.
(Table: iPhone and iPod Production) According to the table on iPhone and iPod production, which of the following is TRUE?
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Canada has an absolute advantage in producing both iPhones and iPods.
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The United States has an absolute advantage in producing both iPhones and iPods.
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Canada has an absolute advantage in producing iPhones, and the United States has an absolute advantage in producing iPods.
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The United States has an absolute advantage in producing iPhones, and Canada has an absolute advantage in producing iPods.
Correct Answer
A. The United States has an absolute advantage in producing both iPhones and iPods.Explanation
The correct answer is that the United States has an absolute advantage in producing both iPhones and iPods. This means that the United States can produce iPhones and iPods more efficiently and with fewer resources compared to Canada.Rate this question:
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- 21.
(Table: iPhone and iPod Production) According to the table on iPhone and iPod production, the opportunity cost of producing one iPhone is:
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4/3 of one iPod for Canada, and two iPods for the United States.
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Two iPods for Canada, and four iPods for the United States.
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3/4 of one iPod for Canada, and one iPod for the United States.
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One iPod for Canada, and 3/4 of one iPod for the United States.
Correct Answer
A. 3/4 of one iPod for Canada, and one iPod for the United States.Explanation
The opportunity cost of producing one iPhone is 3/4 of one iPod for Canada, and one iPod for the United States. This means that in order to produce one iPhone in Canada, they have to give up producing 3/4 of an iPod. Similarly, in the United States, they have to give up producing one whole iPod to produce one iPhone.Rate this question:
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- 22.
(Table: iPhone and iPod Production) According to the table on iPhone and iPod production, which of the following is TRUE about Canadian and U.S. comparative advantages?
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Canada has a comparative advantage in producing both iPhones and iPods.
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The United States has a comparative advantage in producing both iPhones and iPods.
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Canada has a comparative advantage in producing iPhones, and the United States has a comparative advantage in producing iPods.
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Canada has a comparative advantage in producing iPods, and the United States has a comparative advantage in producing iPhones.
Correct Answer
A. Canada has a comparative advantage in producing iPhones, and the United States has a comparative advantage in producing iPods.Explanation
According to the table on iPhone and iPod production, Canada has a lower opportunity cost of producing iPhones compared to the United States, indicating a comparative advantage in producing iPhones. On the other hand, the United States has a lower opportunity cost of producing iPods compared to Canada, indicating a comparative advantage in producing iPods. Therefore, Canada has a comparative advantage in producing iPhones, and the United States has a comparative advantage in producing iPods.Rate this question:
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- 23.
(Figure: PPF Goods X & Y) Refer to the figure. Which of the points representing various consumption possibilities for the country portrayed above isonly attainable through foreign trade?
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Point A
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Point B
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Point C
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Both points C and B
Correct Answer
A. Point CExplanation
Point C is only attainable through foreign trade because it lies outside the production possibilities frontier (PPF) curve. The PPF curve represents the maximum amount of goods that can be produced given the available resources and technology. Any point outside the PPF curve is unattainable without trading with other countries to obtain additional resources or goods. Therefore, Point C can only be reached through foreign trade.Rate this question:
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- 24.
(Figure: PPF Goods X & Y) Refer to the figure. Point A represents an allocation of resources that is:
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Efficient.
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Inefficient.
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Impossible.
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The result of trade.
Correct Answer
A. Inefficient.Explanation
Point A represents an inefficient allocation of resources because it is inside the production possibilities frontier (PPF). This means that resources are not being fully utilized and there is potential to produce more of both goods X and Y. An efficient allocation would be on the PPF curve, where resources are fully utilized and there is no wasted potential.Rate this question:
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- 25.
(Table: Production Possibilities for the United States and Mexico) According to the table on production possibilities for the United States and Mexico, Mexico has an absolute advantage in ----------- and a comparative advantage in ---------
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Neither good; corn
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Corn; potatoes
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Potatoes; corn
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Neither good; potatoes
Correct Answer
A. Neither good; cornExplanation
Mexico has an absolute advantage in neither good, meaning that it does not have a clear advantage in producing either corn or potatoes compared to the United States. However, Mexico has a comparative advantage in corn. This means that Mexico can produce corn at a lower opportunity cost compared to the United States. Therefore, it is more efficient for Mexico to specialize in producing corn and trade with the United States for potatoes, which they do not have a comparative advantage in.Rate this question:
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- 26.
(Table: Production Possibilities for the United States and Mexico) According to the table on production possibilities for the United States and Mexico, the United States has an absolute advantage in --------- and a comparative advantage in --------
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Both goods; corn
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Both goods; potatoes
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Potatoes; corn
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Nothing; potatoes
Correct Answer
A. Both goods; potatoesExplanation
The United States has an absolute advantage in both goods, meaning it can produce both corn and potatoes more efficiently than Mexico. However, it has a comparative advantage in potatoes, which means it has a lower opportunity cost in producing potatoes compared to corn. This suggests that the United States should specialize in producing potatoes and trade with Mexico for corn, as Mexico likely has a comparative advantage in corn production.Rate this question:
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- 27.
(Table: Production Possibilities for the United States and Mexico) According to the table on production possibilities for the United States and Mexico, Mexico's opportunity cost of producing each ton of potatoes is ------- while the United States' opportunity cost of producing each ton of potatoes is -------
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0.125 tons of potatoes; 0.2 tons of potatoes
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Eight tons of corn; 0.2 tons of potatoes
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Eight tons of corn; five tons of corn
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Five tons of corn; 0.2 tons of corn
Correct Answer
A. Eight tons of corn; five tons of cornExplanation
Mexico's opportunity cost of producing each ton of potatoes is eight tons of corn, while the United States' opportunity cost of producing each ton of potatoes is five tons of corn. This means that for Mexico to produce one ton of potatoes, it has to give up the opportunity to produce eight tons of corn. On the other hand, for the United States to produce one ton of potatoes, it has to give up the opportunity to produce five tons of corn.Rate this question:
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- 28.
(Table: Production Possibilities for the United States and Mexico) Using the table on production possibilities for the United States and Mexico, assume each country specializes in the good for which it has a comparative advantage. Which of the following answers identifies a trade price that both countries would find acceptable? (Units are in tons.)
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0.2 potato for one corn < Trade price < five corns for one potato
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0.125 potato for one corn,< Trade price < eight potatoes for one corn
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Five corns for one potato < Trade price < eight corns for one potato
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0.125 potato for one corn < Trade price < five potatoes for one corn
Correct Answer
A. Five corns for one potato < Trade price < eight corns for one potatoExplanation
The given answer states that the trade price should be between five corns for one potato and eight corns for one potato. This means that the United States is willing to trade one potato for a minimum of five corns and a maximum of eight corns. Likewise, Mexico is willing to trade one potato for a minimum of five corns and a maximum of eight corns. Therefore, both countries would find this trade price acceptable as it falls within their respective ranges.Rate this question:
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- 29.
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is , and the opportunity cost of producing one sofa in Germany is
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Two clocks; three clocks
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10 clocks; 27 clocks
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0.4 clocks; 0.33 clocks
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2.5 clocks; three clocks
Correct Answer
A. 2.5 clocks; three clocksExplanation
According to the table, the opportunity cost of producing one sofa in the United States is 2.5 clocks, and the opportunity cost of producing one sofa in Germany is three clocks. This means that for every sofa produced in the United States, 2.5 clocks must be given up, while in Germany, three clocks must be given up. This indicates that the United States has a comparative advantage in producing sofas, as it has a lower opportunity cost compared to Germany.Rate this question:
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- 30.
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one clock in the United States is --------- , and the opportunity cost of producing one clock in Germany is --------
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Five sofas; nine sofas
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0.4 sofas; 0.33 sofa
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Five clocks; nine clocks
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2.5 clocks; three clocks
Correct Answer
A. 0.4 sofas; 0.33 sofaExplanation
According to the table, the opportunity cost of producing one clock in the United States is 0.4 sofas, and the opportunity cost of producing one clock in Germany is 0.33 sofa. This means that in the United States, producing one clock requires giving up the production of 0.4 sofas, while in Germany, producing one clock requires giving up the production of 0.33 sofa. Therefore, it is more efficient for Germany to produce clocks as they have a lower opportunity cost compared to the United States.Rate this question:
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- 31.
(Table: Production in the United States and Germany) According to the table, which of the following statements is true?
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The United States has a comparative advantage in clocks.
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Germany has an absolute advantage in clocks and sofas.
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The United States has a comparative advantage in sofas.
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The United States has a comparative advantage in clocks and sofas.
Correct Answer
A. The United States has a comparative advantage in sofas.Explanation
The table shows that the United States produces 30,000 sofas, while Germany produces only 20,000 sofas. This indicates that the United States has a higher production capacity and efficiency in producing sofas compared to Germany. Therefore, the statement "The United States has a comparative advantage in sofas" is true.Rate this question:
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- 32.
Brazil can produce one unit of sugar cane for one unit of labor and one iPod for eight units of labor, and China can produce one unit of sugar cane for two units of labor and one iPod for four units of labor. Which of the following is TRUE?
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Brazil has a comparative advantage in sugar cane production and an absolute advantage in iPod production.
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Both countries have a comparative in sugar cane production.
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China has an absolute advantage in production of both goods.
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Brazil has both a comparative advantage and an absolute advantage in sugar cane production.
Correct Answer
A. Brazil has both a comparative advantage and an absolute advantage in sugar cane production.Explanation
Brazil has a comparative advantage in sugar cane production because it can produce one unit of sugar cane with less labor compared to China. Brazil also has an absolute advantage in sugar cane production because it can produce one unit of sugar cane with the same amount of labor as China, but it can also produce one iPod with fewer units of labor compared to China. Therefore, the given answer is true.Rate this question:
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- 33.
Brazil can produce one unit of sugar cane for one unit of labor and one iPod for eight units of labor, and China can produce one unit of sugar cane for two units of labor and one iPod for four units of labor. What are each country's opportunity costs of producing iPods?
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Brazil: 4 units of sugar cane; China: 2 units of sugar cane
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Brazil: 8 units of sugar cane; China: 2 units of sugar cane
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Brazil: 1/8 unit of sugar cane; China: 1/2 unit of sugar cane
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Brazil: 1/2 unit of sugar cane; China: 1/2 unit of sugar cane
Correct Answer
A. Brazil: 8 units of sugar cane; China: 2 units of sugar caneExplanation
The opportunity cost of producing iPods is the amount of sugar cane that each country has to give up in order to produce one iPod. In Brazil, it takes one unit of labor to produce one unit of sugar cane and eight units of labor to produce one iPod. Therefore, the opportunity cost for Brazil is 8 units of sugar cane. In China, it takes two units of labor to produce one unit of sugar cane and four units of labor to produce one iPod. Therefore, the opportunity cost for China is 2 units of sugar cane.Rate this question:
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- 34.
Brazil can produce one unit of sugar cane for one unit of labor and one iPod for eight units of labor, and China can produce one unit of sugar cane for two units of labor and one iPod for four units of labor. Which of the following is true?
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Before trade, China's opportunity cost of one unit of sugar cane is two iPods.
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China has an absolute advantage in sugar cane production.
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Both parties benefit if they specialize and trade at terms of one unit of sugar cane for two iPods.
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With trade, Brazil should specialize in sugar cane and China in iPods.
Correct Answer
A. With trade, Brazil should specialize in sugar cane and China in iPods.Explanation
Before trade, China's opportunity cost of one unit of sugar cane is two iPods. China can produce one unit of sugar cane for two units of labor and one iPod for four units of labor. Therefore, the opportunity cost of one unit of sugar cane for China is two iPods (4 units of labor for one iPod divided by 2 units of labor for one unit of sugar cane). Since Brazil has a lower opportunity cost of producing sugar cane (one unit of labor for one unit of sugar cane), it should specialize in sugar cane production. China, on the other hand, has an absolute advantage in producing iPods (it can produce one iPod for four units of labor compared to Brazil's eight units of labor). Therefore, China should specialize in iPod production. By specializing and trading at terms of one unit of sugar cane for two iPods, both parties can benefit.Rate this question:
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