Chapter 3 Interdependence And The Gains From Trade- Will Mealer

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People who provide you with goods and services

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do so because they get something in return

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When an economist points out that you and millions of other people are interdependent, he or she is referring to the
fact that we all

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rely upon one another for the goods and services we all consume.

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People generally choose to depend upon others for goods and services. Economists view this interdependence as

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a good thing, since it allows people to consume more goods and services than they would otherwise be able to consume.

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Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes vases, but Regan is better at producing both. In this case, trade could

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benefit both Jayson and Regan.

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Ben bakes bread and Shawna knits sweaters. Ben likes to eat bread and wear sweaters, and the same is true for
Shawna. In which of the following cases is it impossible for both Ben and Shawna to benefit from trade?

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None of the above is correct.

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Shannon bakes cookies and Justin grows vegetables. In which of the following cases is it impossible for both
Shannon and Justin to benefit from trade?

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Shannon does not like vegetables and Justin does not like cookies

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Consider a shoemaker and a vegetable farmer. Potentially, trade could benefit both individuals if

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a. the shoemaker can produce only shoes and the vegetable farmer can produce only vegetables.
b. the shoemaker is capable of growing vegetables, but he is not very good at it.
c. the vegetable farmer is better at growing vegetables and better at making shoes than the shoemaker.

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without trade

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a country's production possibilities frontier is also its consumption possibilities frontier

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A country's consumption possibilities frontier can be outside its production possibilities frontier if

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the country engages in trade.

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A production possibilities frontier will be a straight line if

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. increasing the production of one good by x units entails a constant opportunity cost in terms of the other good

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The difference between production possibilities frontiers that are bowed out and those that are straight lines is that

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bowed-out production possibilities frontiers illustrate increasing opportunity cost, whereas straight-line
production possibilities frontiers illustrate constant opportunity cost.

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Which of the following statements is not correct?

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Absolute advantage is the driving force of specialization

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If labor in Mexico is less productive than labor in the United States in all areas of production,

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both Mexico and the United States still can benefit from trade.

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The production possibilities frontier is a downward-sloping straight line when

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it is possible to switch between one good and the other good at a constant rate

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The opportunity cost of 1 pound of meat for the farmer is

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4 pounds of potatoes

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The opportunity cost of 1 pound of meat for the rancher is

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4/5 pounds of potatoes

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The opportunity cost of 1 pound of potatoes for the farmer is

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1/4 pound of meat.

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The opportunity cost of 1 pound of potatoes for the rancher is

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5/4 pounds of meat.

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The farmer has an absolute advantage in

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potatoes, and the rancher has an absolute advantage in meat.

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The rancher has an absolute advantage in

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meat, and the farmer has a comparative advantage in potatoes

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The farmer has an absolute advantage in

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potatoes, and the rancher has a comparative advantage in meat.

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The rancher has a comparative advantage in

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meat, and the farmer has a comparative advantage in potatoes.

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. The farmer and the rancher both could benefit if the farmer were to specialize in

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potatoes and the rancher were to specialize in meat

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If Paul divides his time equally between corn and wheat, he will be able to produce

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4 bushels of wheat and 5 bushels of corn.

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The opportunity cost of 1 bushel of wheat for Cliff is

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2/3 bushel of corn

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The opportunity cost of 2 bushels of corn for Cliff is

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3 bushels of wheat.

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. The opportunity cost of 1 bushel of corn is

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. 4/5 bushel of wheat for Paul and 3/2 bushels of wheat for Cliff; thus, Paul has the comparative advantage in
growing cor

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Opportunity cost | Comparative advantage

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7 bushels of wheat and 7 bushels of corn

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Assume Cliff and Paul were both producing wheat and corn, and each person was dividing
his time equally between the two. Then each decides to specialize in the product in which he has a comparative
advantage. As a result of this change, total production of corn would

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increase by 3 bushels.

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Assume Cliff and Paul were both producing wheat and corn, and each person was dividing
his time equally between the two. Then each decides to specialize in the product in which he has a comparative
advantage. Furthermore, they agree to trade 3 bushels of wheat for 3 bushels of corn. As a result of these new
arrangements, Cliff is able to consume

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3 bushels of wheat and 3 bushels of corn, and this point lies outside of Cliff’s production possibilities frontier.

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Which of the following statements is correct?

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Paul has an absolute advantage in both wheat and corn.

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Which of the following statements is correct?

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Cliff has a comparative advantage in wheat and Paul has a comparative advantage in corn.

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Suppose Paul must work 2 hours to produce each bushel of corn. Then Paul’s production
possibilities frontier is based on how many hours of work?

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20 hours

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Suppose Paul must work 2 hours to produce each bushel of corn. Then Paul

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must work 2.5 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 0.8
bushels of wheat.

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1. Suppose Cliff must work 5 hours to produce each bushel of corn. Then Cliff’s production
possibilities frontier is based on how many hours of work?

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20 hours

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Suppose Cliff must work 5 hours to produce each bushel of corn. Then Cliff

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. must work 3 1/3 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 1.5
bushels of wheat

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For Ben, the opportunity cost of 1 pound of ice cream is

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4 pound of cones.

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. For Jerry, the opportunity cost of 1 pound of ice cream is

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3/2 pounds of cones

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For Ben, the opportunity cost of 1 pound of cones is

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1/4 pound of ice cream.

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For Jerry, the opportunity cost of 1 pound of cones is

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2/3 pound of ice cream