Reference no: EM131024724

First Midterm - II

Use the information below to answer the next two questions.

Italy and Hong Kong produce rice and alcoholic drinks. The table below shows input requirements per unit of rice and alcoholic drinks. Both countries have constant opportunity costs of production (i.e., both countries have linear production possibility frontiers with respect to these two goods).

	Rice	Alcoholic Drinks
Italy	10 units of labor	20 units of labor
Hong Kong	50 units of labor	10 units of labor

1. The opportunity cost of producing 1 unit of alcoholic drinks for Italy is

a.) 2 units of rice.

b.) 1/2 unit of rice.

c.) 5 units of rice.

d.) 1/5 unit of rice.

2. For the trade of alcoholic drinks between Italy and Hong Kong to be possible, the relative price (terms of trade) of alcoholic drinks should be

a.) between 1/2 unit of rice and 5 units of rice.

b.) between 1/5 unit of rice and 2 units of rice.

c.) between 2 units of rice and 5 units of rice.

d.) between 1/5 unit of rice and 1/2 unit of rice.

3. Suppose a small country's domestic demand and domestic supply curves for apples are respectively represented by P = 16 - 2Q and P = 8 + 2Q. The market is opened to international trade, and the world price is $10. What is the quantity of apples that are domestically supplied when this economy opens to trade?

a.) 2

b.) 3

c.) 1

d.) 0

Answer the next two questions using the diagram below illustrating the market for a good in a small economy. Assume this economy as represented below is a closed economy.

4. The figure above shows the domestic supply and domestic demand curves for oranges in a small country. The country opens the orange market to international trade and the world price for oranges is $5. Suppose the government decides to impose a quota in the market for oranges that restricts the level of imports to 40 units of oranges. The decrease in the domestic consumer surplus due to the import quota is equal to areas:

a.) C + D + E + F + G

b.) D + E + F + G + H + I

c.) D + G

d.) H + I

5. Assume the world price of the above good is $5. If this economy moves from being a closed economy to an economy with free trade in the market for this good, then

a.) all domestic producers of this product must be better off when this country decides to become an open economy.

b.) all domestic consumers of this product must be better off when this country decides to become an open economy.

c.) non-domestic consumers of this good will be better off when this country decides to become an open economy.

d.) non-domestic producers of this good will be worse off when this country decides to become an open economy.

6. Consider the market for rapeseed oil (this oil is used in food preparation as well as a bio-fuel). Holding everything else constant, an increase in the rate of growth of the world population and an increase in gasoline prices will cause

a.) a shift of both the demand and supply schedules that will increase the equilibrium quantity of rapeseed oil while having an indeterminate effect on the equilibrium price of rapeseed oil.

b.) a shift of the supply curve resulting in a decrease in the equilibrium price of rapeseed oil and an increase in the equilibrium quantity of rapeseed oil.

c.) a shift in the demand curve that will cause an increase in the equilibrium quantity and the equilibrium price of rapeseed oil.

d.) a shift in the demand curve, but it is unclear whether the demand curve shifts to the right or to the left from the information given: thus, it is unclear what the effect of these changes are on the equilibrium price and equilibrium quantity of rapeseed oil.

7. Which of the following is correct? Holding everything else constant,

a) a change in tastes causes an increase in the supply schedule.

b) a change in the price of a related good causes a shift in the demand schedule.

c) a change in technology causes a movement along the supply schedule.

d) a change in income causes a movement along the demand schedule.

Use the information in the table to answer next two questions.

The table below shows the maximum amounts of cars and boats that Japan and Hong Kong can produce given their resources, available technology, and the time period. Both countries have constant opportunity costs of production (i.e., the production possibility frontiers for these two countries are linear).

	Cars	Boats
Japan	100	50
Hong Kong	60	60

8. Which of the following sentences is correct?

a.) Japan has an absolute advantage in producing boats and will therefore produce boats if the two countries specialize and then trade with one another.

b.) Japan has an absolute advantage in producing cars and the Japanese opportunity cost of producing cars is lower then Hong Kong's opportunity cost of producing cars.

c.) Even though Hong Kong has an absolute advantage in producing cars, Hong Kong will produce boats.

d.) Neither Hong Kong nor Japan has an absolute advantage in the production of either of these two goods.

9. Japan and Hong Kong will trade cars and boats with one another as long as

a.) Japan gets less then ½ boat for each car Japan provides to Hong Kong.

b.) Hong Kong gets less then ½ boat for each car Hong Kong provides to Japan.

c.) Hong Kong gets more then ½ boat for each car it provides to Japan and Japan gets more than 1 car for each boat it provides to Hong Kong.

d.) Japan gets more then ½ boat for each car it provides to Hong Kong and Hong Kong gets more than one car for each boat it provides to Japan.

10. The figure above shows the domestic demand and supply curves for cars in a small open economy. The world price is $20,000. The government is considering an import quota on cars that would have the same effect on domestic consumer surplus and domestic producer surplus as an import tariff of $5000. What import quota would achieve the government's goal?

a.) 2 units

b.) 4 units

c.) an amount equal to F + G

d.) an amount equal to C + E + F + G + H

11. If a small economy, such as Hong Kong, opens its markets to international trade, then in those markets where the small economy exports goods (its export sectors) the

a.) consumer surplus and producer surplus in Hong Kong both increase and the Hong Kong economy as a whole gains from this trade.

b.) consumer surplus in Hong Kong rises, the producer surplus in Hong Kong falls, and the Hong Kong economy as a whole gains from this trade.

c.) consumer surplus in Hong Kong decreases while producer surplus in Hong Kong increases but the overall effect of this trade is a net loss of surplus for the Hong Kong economy.

d.) consumer surplus in Hong Kong decreases while the producer surplus in Hong Kong increases, but the overall effect of this trade is a net gain for the Hong Kong economy.

12. If an economy open its markets to free international trade and it exports goods, then

a.) consumer and producer surpluses both increase and the economy as a whole gains.

b.) consumer surplus increases, producer surplus decreases, and the economy as a whole gains.

c.) consumer surplus decreases, producer surplus increases and the economy as a whole gains.

d.) the decrease in consumer surplus is sufficiently large enough to cause a net loss for the economy.

13. Suppose there are two consumers in a market. These two consumers' demand curves are represented by P = 5 - Q and P = 10 - (1/2)Q respectively, where P is the price and Q is the quantity demanded. Then the market demand curve is

a.) Q = 25 - 3P for 0?P?5 and Q = 20 - 2P for 5?P?10.

b.) P = 25 - 3Q for 0?P?5 and P = 20 - 2Q for 5?P?10.

c.) P = 15 - (3/2)Q for 0?P?5 and P = 10 - (1/2)Q for 5?P?10.

d.) Q = 25 - 3P for all price levels.

14. Suppose in the market for a good the supply schedule is given by Q = 10 + 2P and the demand schedule is given by Q = 22 - 4P. Then, holding everything else constant,

a.) the equilibrium price is 3.

b.) the equilibrium quantity is 2.

c.) the equilibrium quantity is 14.

d.) the equilibrium quantity is 14 and the equilibrium price is 3.

15. Suppose both the market demand and market supply curves for a good shift to the right by the same magnitude. That is, for each price level, both the quantity demanded and the quantity supplied increase by the same amount. Then

a.) the equilibrium quantity will decrease, but there is no change in the equilibrium price.

b.) the equilibrium quantity will increase, but the equilibrium price will decrease.

c.) both the equilibrium quantity and equilibrium price will increase.

d.) the equilibrium quantity will increase, but there is no change in the equilibrium price.

16. Indeterminacy in quantities happens when the

a.) supply curve and the demand curve for a good shift in the same direction.

b.) supply curve and the demand curve for a good shift in opposite directions from one another.

17. The effect of an introduction of a quota or a tariff in the market for a good is different because

a.) tariffs always increase government revenues.

b.) the change in consumer surplus with the imposition of a quota must be greater than the change in consumer surplus with the imposition of a tariff.

18. The effect of tariffs or quotas in the market for a good is

a.) unambiguously bad for all economic agents (i.e., domestic consumers and domestic producers). In other words the imposition of a tariff or a quota will reduce producer surplus and consumer surplus in the domestic market for the good.

b.) good for domestic producers because it increases their surplus but bad for domestic consumers because it decreases their surplus.

19. Civil unrest occurs in Nigeria, a major producer of crude oil, which restricts the world supply of crude oil. Note that crude oil is refined into gasoline. Holding everything else constant, how will this affect the equilibrium quantity of conventional automobiles which must use gasoline to operate? The equilibrium quantity of conventional automobiles will

a.) Increase.

b.) Decrease.

20. Holding everything else constant, an increase in the price of substitutes will shift the demand curve for the related good to the

a) right.

b) left.

21. Suppose the world price is below the domestic price for a good in a small economy. Then which group in that economy would be in favor of government-imposed import restrictions (a quota would be an example of a government-imposed import restriction)?

a.) Domestic producers.

b.) Domestic consumers.

22. A small country's domestic demand and supply curves for a cosmetic product are respectively represented by P = 13 - 2Q and P = 5 + 2Q. The world price is $9. When the economy moves from a closed economy to free trade, which of the following statements is true?

a.) The consumers in this market are better off.

b.) There is no change in the total surplus.

23. Suppose China has 9000 units of capital and Japan has 6000 units of capital. We know that the maximum agricultural production in China is larger than the maximum agricultural production in Japan. Then

a.) we can conclude that China has an absolute advantage in agricultural production.

b.) we do not have enough information to determine which country has the absolute advantage in agricultural production.

24. Suppose initially that a small economy's markets are open to international trade. If this economy then closes all of its markets to international trade, then

a.) Everyone in this economy who have been involved in international trade will gain from this change in policy.

b.) The economy as a whole will suffer a loss from this decision to eliminate international trade in this economy.

25. There are two countries: the US and Korea. Suppose both countries produce two goods: cars and airplanes. If the US has an absolute advantage in the production of both cars and airplanes, then there must be no gain to be had from specialization and trade between these two countries irrespective of the relative price ranges.

a.) True

b.) False

26. The above diagram shows a production possibility frontier of a country. According to the graph,

a.) the opportunity cost of producing Y increases as the quantity of good Y increases.

b.) the opportunity cost of producing Y decreases as the quantity of good Y increases.

27.) Suppose a small country has opened its markets to international trade and is currently importing good X. Which of the following statements is true?

a.) If the government of the small country imposes a tariff on good X, consumer surplus will increase.

b.) If the government of the small country imposes a tariff on good X, producer surplus will increase.