The country has endowment at E. It faces autarky prices AEB.

It can trade at relative prices represented by

CED. After trade, the country has consumption represented by point F.
1.

Exports for this country are represented by

(a) FG.
(b) EG.
(c) OD.
(d) FE.
(e) OA.
Answer: (b)

2.

Imports for this country are represented by

(a) FG.
(b) EG.
(c) OD.
(d) FE.
(e) OA.
Answer: (a)

3.

If the world price of food fell, the country would generally

(a) export food.
(b) import less food.
(c) export more clothing.
(d) export less clothing.
(e) not change imports or exports.
Answer: (d)

4.

With trade, the market value of exports is

(a) greater than the value of imports.
(b) less than the value of imports.
(c) equal to zero.
(d) equal to the value of imports.
(e) equal to the value of the endowment.
Answer: (d)

5.

If this country were to lose 10 percent of its clothing endowment it would

(a) export more clothing, import less food.
(b) export more clothing, import more food.
(c) export less clothing, import more food.
(d) not change imports or exports.
(e) export less clothing, import less food.
Answer: (e)

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Questions 610 concern a situation where 2 countries have identical preferences, but country A has an
endowment with more food and less clothing than B.
6.

Under autarky, the relative price of food will be

(a) higher in B.
(b) higher in A.
(c) the same in both countries.
(d) 1.
(e) Not enough information is given.
Answer: (a)

7.

Under autarky, country B

(a) consumes more food than A.
(b) consumes the same amount of food as A.
(c) consumes no food.
(d) consumes less food than A.
(e) consumes the same amount of food as country A does clothing.
Answer: (d)

8.

With free trade between countries with equal incomes,

(a) country B consumes no food.
(b) country A consumes no clothing.
(c) the value of As clothing imports will be greater than Bs food imports.
(d) both consume exactly the same.
(e) relative prices differ across countries.
Answer: (d)

9.

With free trade, country A will

(a) import clothing.
(b) produce no clothing.
(c) consume no clothing.
(d) export clothing.
(e) consume less clothing than is in its endowment.
Answer: (a)

10. If country Bs clothing endowment increases,

(a) world demand for clothing falls.
(b) As autarky relative price of food rises.
(c) Bs autarky relative price of clothing increases.
(d) world prices are the same in free-trade equilibrium.
(e) the world price of clothing in free-trade equilibrium falls.
Answer: (e)

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11. In free trade equilibrium,

(a) domestic demand equals domestic supply for all goods in all countries.
(b) world demand equals world supply for all goods.
(c) domestic demand exceeds domestic supply for goods that are exported.
(d) world demand exceeds world supply for goods that are imported.
(e) world demand equals world supply only for goods not traded.
Answer: (b)
12. The slope (in absolute value) of the budget line represents
(a) the relative price of one good in terms of another good.
(b) how much of one good a consumer must give up to get one unit of the other good.
(c) the equilibrium proportion in which the two goods are consumed.
(d) all of the above.
(e) nothing.
Answer: (d)
13. Two countries produce different varieties of the same two goods, food and clothing. If there is zero
net trade in clothing, there must also be
(a) zero net trade in food.
(b) zero gross trade in food.
(c) high gross trade in food.
(d) high gross trade in clothing.
(e) zero gross trade in clothing.
Answer: (a)
Questions 1415 concern the following scenario:
There are two commodities, food and clothing. In autarky an individual is a net seller of food. His country
opens up to trade and the price of food drops. He remains a net seller of food.
14. He receives no compensation. How does opening up to trade change welfare in the country?
(a) He and his country (net) are worse off than before opening up to trade.
(b) He is worse off, but his country is better off than before opening up to trade.
(c) Everyone in the country is better off than before opening up to trade.
(d) He is better off, but his country is worse off than before opening up to trade.
(e) We cannot tell who benefits and who is hurt by opening up to trade.
Answer: (b)

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15. All net sellers of food receive enough compensation to keep them at the same level of welfare. How
does opening up to trade change welfare in the country overall?
(a) The country is better off (net) and net sellers of clothing are better off than before
opening up to trade.
(b) The country is worse and net sellers of clothing are worse off than before opening
up to trade.
(c) The country is better off (net) and net sellers of clothing are worse off than before
opening up to trade.
(d) The country is worse off (net) and net sellers of clothing are better off than
before opening up to trade.
(e) The country cannot afford to compensate all of the net food sellers.
Answer: (a)
16. In a world with many countries and only food and clothing, if countries all have the same
endowments but different tastes,
(a) there will be no trade as endowments are all the same.
(b) the country with the lowest autarky relative price for food will import food in free
trade equilibrium.
(c) the country with the highest autarky relative price for food will import food in free
trade equilibrium.
(d) the country with the highest autarky relative price for clothing will export clothing.
(e) the pattern of trade cannot be determined as there are many countries.
Answer: (c)
17. If a country experiences an improvement in technology,
(a) indifference curves shift outwards.
(b) indifference curves shift inwards.
(c) the production possibilities frontier shifts outwards.
(d) the production possibilities frontier becomes bowed inwards.
(e) the production possibilities frontier shifts inwards.
Answer: (c)
18. Efficient consumption in autarky
(a) must be at a point below the production possibilities frontier.
(b) requires tangency between indifference curves and the production possibilities frontier.
(c) requires that a country produce only one good.
(d) requires indifference curves and the production possibilities frontier to cross.
(e) is not affected by changes in tastes.
Answer: (b)

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19. In autarky, a preference shift towards food

(a) will result in a country producing less food and more clothing.
(b) will result in a country producing more food and more clothing.
(c) will result in a country producing more food and less clothing.
(d) will result in a country producing less food and less clothing.
(e) does not affect the amount of food or clothing produced.
Answer: (c)
20. If the relative world price of food is lower than the autarky price,
(a) trade will lead to no change in food production.
(b) trade will lead to increased food production.
(c) trade will lead to decreased food production.
(d) there will be no gains from trade.
(e) trade will lead to the country exporting food.
Answer: (c)
21. A sharply bowed-out production possibilities frontier embodies
(a) the law of decreasing costs.
(b) the fact that the consumers marginal utility of consumption decreases as they consume more of a
good.
(c) the fact that the costs of obtaining an extra unit of a good increase as more of that good is
produced.
(d) the fact that the country in question is in autarky.
(e) the variety of goods a country can produce
Answer: (c)
22. A country that has a comparative advantage in clothing production
(a) has a production possibilities frontier that lies outside the PPF of all other countries.
(b) must have better technology for making clothing than all other countries.
(c) will import clothing with trade.
(d) has the lowest relative autarky price for clothing.
(e) may have poorer clothing producing technology than some other countries.
Answer: (e)
23. In autarky, a country produces a number of varieties of an aggregate good. Trade will
(a)
(b)
(c)
(d)
(e)

increase the number of varieties produced.

increase production of all varieties, but keep the same number of varieties.
decrease production of all varieties, but keep the same number of varieties.
decrease the number of varieties produced.
decrease production of some varieties, increase production of others, but keep the same number
of varieties.
Answer: (d)

Chapter 2

The Gains from Trade

24. All of the following are sources of gains from trade except
(a) increased product variety in consumption.
(b) production of goods in which a country has a comparative advantage.
(c) concentration of production in fewer varieties of goods.
(d) allowing a country to produce beyond its PPF.
(e) learning about new technology from abroad.
Answer: (d)
1.

In a world with many countries,

(a) the value of exports and imports between each pair of countries must be equal.
(b) there must be zero net trade across varieties of any good.
(c) immiserizing growth cannot occur.
(d) there is no secondary effect of a transfer of resources from one country to another.
(e) the value of exports and imports between pairs of countries may not be equal.
Answer: (e)

2.

An increase in foreign demand for homes exports must

(a) be caused by a drop in the price of homes export good.
(b) cause arise in the price of homes export.
(c) increase homes exports.
(d) decrease homes exports.
(e) none of the above.
Answer: (b)

3.

An increase in demand for US exports may lead to

(a) a decline in US export volume.
(b) a deterioration of US terms of trade.
(c) a shift in the world supply for this good.
(d) a decrease in world demand.
(e) a decrease in US real income.
Answer: (a)

4.

A decrease in the supply of US imports will

(a) shift world demand for the imports.
(b) increase world supply for the imports.
(c) not affect world prices.
(d) lead to increased volume of US imports.
(e) lead to a deterioration in US terms of trade.
Answer: (e)

Chapter 2

5.

The Gains from Trade

Taxing imports leads to

(a) increased domestic production of the imported good.
(b) increased domestic consumption of the imported good.
(c) an increase in the world supply of the imported good.
(d) an increase in the world price of the imported good.
(e) an increase in the world demand for the imported good.
Answer: (a)

6.

A small country that cannot affect world prices

(a) may experience immiserizing growth.
(b) may gain from making a transfer abroad.
(c) will experience welfare losses from a policy of import protection.
(d) will have no change in welfare from a policy of import protection.
(e) can only affect world demand and not world supply for goods.
Answer: (c)

7.

A country can gain by restricting production of its export commodity

(a) only if it is small, so the negative effects are not large.
(b) if it is large and demand for its export is sufficiently inelastic.
(c) always.
(d) never.
(e) if it is small and demand for its export is sufficiently elastic.
Answer: (b)

8.

Immiserizing growth is most likely to occur if

(a) world demand elasticity for the growing countrys exports is low.
(b) world demand elasticity for the growing countrys exports is high.
(c) world supply elasticity for the growing countrys exports is low.
(d) world supply elasticity for the growing countrys exports is high.
(e) elasticity does not matter.
Answer: (a)

9.

Immiserizing growth is most likely to occur if

(a) growth is concentrated in a countrys import sector.
(b) growth is balanced across exports and imports.
(c) growth is concentrated in goods with high world demand elasticity.
(d) the country experiencing growth is small.
(e) growth is concentrated in a countrys export sector.
Answer: (e)

10. Growth concentrated in a large countrys import sector will lead to

(a)
(b)
(c)
(d)
(e)

an increase in world supply of its imports, and thus an improvement in its terms of trade.
an increase in world supply of its imports, and thus a deterioration in its terms of trade.
an increase in world demand for its imports, and thus an improvement in its terms of trade.
an increase in world demand for its imports, and thus a deterioration in its terms of trade.
no change in the countrys terms of trade.

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Answer: (a)
11. Which of the following statements is incorrect?
(a) Immiserizing growth is most likely to result from growth biased towards exports.
(b) Immiserizing growth is most likely to result if demand elasticity for a countrys exports is low.
(c) Balanced growth cannot be immiserizing.
(d) A small country cannot experience immiserizing growth.
(e) Immiserizing growth is most likely to result if trade volumes are large.
Answer: (c)
12. If country 1 transfers income to country 2, the terms of trade will worsen for country 1 if
(a) 1s marginal propensity to import is 0.5 and 2s marginal propensity to import is 0.5.
(b) 1s marginal propensity to import is 0.5 and 2s marginal propensity to import is 0.7.
(c) 1s marginal propensity to import is 0.7 and 2s marginal propensity to import is 0.5.
(d) 1s marginal propensity to import is 0.3 and 2s marginal propensity to import is 0.5.
(e) 1s marginal propensity to import is 0.3 and 2s marginal propensity to import is 0.8.
Answer: (d)
13. If there are only two countries and both have marginal propensity to import of 0.3, then
(a) giving away income may lead to welfare gains.
(b) giving away income will always lead to welfare losses.
(c) receiving money may result in welfare losses.
(d) the terms of trade move in favor of the giving country.
(e) receiving money will always result in welfare losses.
Answer: (b)
14. A transfer of purchasing power
(a) does not affect world prices.
(b) may shift world demand.
(c) may shift world supply.
(d) may shift both world supply and demand.
(e) always causes the terms of trade to move in favor of the giver.
Answer: (b)
15. A transfer of real resources
(a) does not affect world prices.
(b) may shift world demand.
(c) may shift world supply.
(d) may shift both world supply and demand.
(e) always causes the terms of trade to move in favor of the giver.
Answer: (d)

Chapter 2

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10

16. There are only 2 countries. Country 1 can produce only food and 2 only clothing. Country 2 transfers
resources to 1. Then
(a) world food output falls.
(b) world demand for food rises.
(c) the terms of trade will not change.
(d) the world relative price of food will fall.
(e) the world relative price of food will rise.
Answer: (d)
17. There are two countries in the world. Country A exports food while country B exports clothing.
Demand for both is highly inelastic and very little of each good is consumed in the country it is
produced. One year country A has an unusually large crop of food. As the As economic adviser,
what do you recommend? Country B will take no retaliatory action against you.
(a) Do nothing. Sell all the food crop.
(b) Burn some of, all or more than the excess food.
(c) Give the excess food away and take advantage of a secondary benefit of the gift.
(d) Try to produce even more food.
(e) You cant make any recommendation from the information given.
Answer: (b)
18. Suppose a small nation with balanced trade realizes that it overestimated its natural resources. It is
evident that its income will fall in the future. How will its trading pattern change?
(a)
(b)
(c)
(d)
(e)

It will not change. Trade will remain balanced.

The country will begin to import more now while income is high.
The country will run trade surpluses to save for lower future income.
The country will export less now so that exports will not fall in the future.
It will not change now, but imports will fall in the future as income and exports fall. Trade will
always remain balanced.
Answer: (c)
19. The terms of trade for a country will change as a result of
(a) changes in tastes.
(b) changes in foreign technology.
(c) changes in foreign resource endowments.
(d) (a) and (c).
(e) all of the above.
Answer: (e)
20. Which of the following statements is incorrect?
(a) With growth, the world as a whole always gains.
(b) Growth in a countrys export sector will always be immiserizing.
(c) A transfer of real resources shifts world demands.
(d) A transfer of purchasing power shifts world demands.
(e) Expected future productivity increases may be an explanation for trade deficits.
Answer: (b)

Chapter 2

1.

The Gains from Trade

The labor theory of value assumes

(a) wages differ across jobs.
(b) land is a scarce factor of production.
(c) as output expands, so does the number of labor hours required to produce one unit of output.
(d) labor is the only scarce factor of production.
(e) labor is not homogenous.
Answer: (d)

Consider a two-country world where country A is a more efficient producer of food and B is a more
efficient producer of clothing. In the free trade equilibrium, both countries specialize. A discovers a
labor saving breakthrough which allows them to produce both goods with half the labor previously
required. A can now produce food and clothing more efficiently than B. What happens to trade and
production patterns?
(a) A specializes in clothing, B in food.
(b) A produces both food and clothing.
(c) Trade ceases since B can no longer compete in any good.
(d) We cannot say.
(e) Nothing.
Answer: (e)

Questions 3-11 refer to a situation where aLC 1, aLF 2, aLC 2, and aLF 1.
3.

The autarky home relative price of food will be

(a) 1/4.
(b) 1/2.
(c) 1.
(d) 2.
(e) 4.
Answer: (d)

4.

Home labor productivity in the food sector is

(a) 1/4.
(b) 1/2.
(c) 1.
(d) 2.
(e) 4.
Answer: (b)

11

Chapter 2

5.

The Gains from Trade

12

If the foreign country can produce at most 10 units of clothing, then the most food they can produce is
(a) 2.
(b) 5.
(c) 8.
(d) 10.
(e) 20.
Answer: (e)

6.

If home production of food is 3 and home clothing production is 6, then the labor endowment must be
(assuming full employment)
(a) 3.
(b) 6.
(c) 9.
(d) 12.
(e) 15.
Answer: (d)

7.

Which of the following is true?

(a) Home has both a comparative and absolute advantage in clothing.
(b) Home has a comparative advantage in clothing and an absolute advantage in food.
(c) Home has a comparative advantage in food and an absolute advantage in clothing.
(d) Home has both a comparative and absolute advantage in food.
(e) None of the above.
Answer: (a)

8.

With trade, which of the following cannot occur?

(a) Both produce food.
(b) Home produces both and foreign produces clothing.
(c) Home produces food and foreign produces both.
(d) Home produces food and foreign produces clothing.
(e) Both produce clothing.
Answer: (d)

9.

Which are possible production patterns with trade?

(a) Both produce food.
(b) Home produces food and foreign produces clothing.
(c) Home produces both and foreign produces clothing.
(d) Home produces food and foreign produces both.
(e) All of the above.
Answer: (a)

Chapter 2

The Gains from Trade

13

10. If the foreign wage rate is 1, then the highest the home wage could be is
(a) 1/4.
(b) 1/2.
(c) 1.
(d) 2.
(e) 4.
Answer: (d)
11. If L 200 and L 10, and the world demand for food is perfectly inelastic at 100, then
(a) home must be incompletely specialized.
(b) foreign production must be incompletely specialized.
(c) foreign will produce all clothing.
(d) home will produce all food.
(e) world demand cannot be met.
Answer: (a)
12. It is observed that in a two-country Ricardian trading world, one country is incompletely specialized
and the other is not. Then the world relative price of the two goods
(a) must equal the labor input ratio in the specialized country.
(b) must lie between the two countrys labor input ratios.
(c) must be equal to one.
(d) must equal the labor input ratio in the incompletely specialized country.
(e) cannot be inferred from the above information.
Answer: (d)
13. In the Ricardian model, equilibrium relative wages depend on
(a) world demand for each good.
(b) labors productivity in each good it actually produces.
(c) world relative prices.
(d) none of the above.
(e) all of the above.
Answer: (e)
14. Consider a two-country world with trade where both countries are completely specialized. An
increase in the price of clothing must
(a) decrease nominal wages in the clothing producing country.
(b) increase nominal wages in the clothing producing country.
(c) increase nominal wages in the food producing country.
(d) decrease nominal wages in the food producing country.
(e) will not change nominal wages in either country.
Answer: (b)

Chapter 2

The Gains from Trade

14

15. Compensation to labor is $16 in the US and $2.40 in Mexico. This can be explained by
(a) technology differences.
(b) better trained workers in the US.
(c) more capital in the US.
(d) better capital in the US.
(e) all of the above.
Answer: (e)
Consider the following scenario for questions 1618.
There are two countries and five goods. A produces good 1 and 2 while B produces 3, 4, and 5. B
experiences a technological improvement in the production of good 5. Both countries continue
producing the same goods. Assume the price of good 3 does not change through the following
analysis.
16. If the prices of 1 and 2 do not change, who gains and what happens to wage rates?
(a) Wages in A fall and wages in B rise. B gains and A loses.
(b) Wages in B fall and wages in A rise. A gains and B loses.
(c) Wages in A and B remain constant. A gains and B loses since it is now getting less for good 5.
(d) Wages in A and B rise. Both countries gain because of the wage increase.
(e) Wages in A and B remain constant. Everyone who consumes good 5 gains.
Answer: (e)
17. If the prices of 1 and 2 rise significantly, which of the following is possible?
(a) Wages in A fall and wages in B rise. B gains and A loses.
(b) Wages in B fall and wages in A rise. A gains and B loses.
(c) Wages in B remain constant while wages in A rise. A gains and B loses.
(d) Wages in A and B rise. Both countries gain because of the wage increase.
(e) Wages in A and B remain constant. Everyone who consumes good 5 gains.
Answer: (c)
18. If the prices of 1 and 2 fall significantly, which of the following is possible?
(a) Wages in A fall and wages in B remain constant. B gains and A loses.
(b) Wages in B fall and wages in A remain constant. A gains and B loses.
(c) Wages in A and B remain constant. A and B lose since they are now getting less for their exports.
(d) Wages in A and B rise. Both countries gain because of the wage increase.
(e) Wages in A and B remain constant. Everyone who consumes good 5 gains.
Answer: (a)
19. Consider if home produces goods 1 and 2 and the foreign country produces good 3. An improvement
in the technology for producing good 1 with no change in the price of good 3 will lead to
(a) p1 declining, w increasing and w falling.
(b) p1 declining, w increasing and no change in w.
(c) p1 increasing and no changes in wages.
(d) p1 declining and no changes in wages.
(e) p1 declining, wincreasing and no change in w.
Answer: (d)

Chapter 2

The Gains from Trade

15

20. Consider if home produces goods 1 and 2 and the foreign country produces good 3. An improvement
in the technology for producing good 1 with a decline in the price of good 3 will lead to
(a) unambiguous welfare gains for the foreign country.
(b) wages falling both at home and in the foreign country.
(c) unambiguous home welfare gains and foreign welfare losses.
(d) unambiguous home welfare gains and falling foreign wages.
(e) falling home wages and foreign welfare losses.
Answer: (e)
1.

2.

The law of diminishing returns states that as you use more of a variable factor in combination with a
fixed factor
(a) output falls at an increasing rate.
(b) output falls at a decreasing rate.
(c) output rises at a decreasing rate.
(d) output rises at an increasing rate.
(e) output rises at an constant rate.
Answer: (c)
At constant commodity price, labor growth
(a) can lead to a decrease in output of one good.
(b) leads to a balanced increase in output of both commodities.
(c) will lead to unemployment.
(d) (a) and (b) only.
(e) all of the above.
Answer: (b)

3.

If the value of the marginal product of labor exceeds the wage rate then firms will
(a) hire more labor.
(b) hire less labor.
(c) use more land.
(d) use more capital.
(e) both (c) and (d).
Answer: (a)

4.

The owners of the specific factors will lobby together for

(a) an increase in the tariffs on imports.
(b) a decrease in the tariffs on imports.
(c) an increase in the endowment of one type of specific capital.
(d) an increase in the endowment of labor.
(e) nothing. They compete against each other.
Answer: (d)

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5.

The Gains from Trade

Under constant returns to scale, if wages and the return to capital both rise by 10 percent, then
(a) output prices fall by 10%.
(b) unit costs of production fall by 10%.
(c) unit costs of production rise by 10%.
(d) firms profits rise by 10%.
(e) firms profits fall by 10%.
Answer: (c)

6.

If wages rise by 10% and the return to capital rises by 20%, which of the following is a possible
increase in the price of a good that uses both labor and capital as inputs?
(a) 0%
(b) 5%
(c) 10%
(d) 15%
(e) 20%
Answer: (d)

7.

In a specific factors model, if a firm wishes to increase output,

(a) the firm must use more of the specific factor.
(b) unit costs of production will stay the same.
(c) unit costs of production will increase.
(d) the marginal product of the variable factor must rise.
(e) none of the above.
Answer: (c)

8.

In a two sector specific factors model with labor mobile across sectors,
(a) the returns to the fixed factors are zero.
(b) wage rates will be the same in all sectors.
(c) the wage rate will be higher in the sector with a larger amount of specific factor.
(d) all labor must be employed in one sector.
(e) none of the above.
Answer: (b)

9.

If tastes shift towards food and away from clothing, then in a specific factors framework with labor
mobile across sectors,
(a) the value of the marginal products of labor must be equal across sectors in equilibrium.
(b) the value of the marginal product of labor in food production falls.
(c) the value of the marginal product of labor in clothing production falls.
(d) the value of the marginal product of labor in clothing production rises.
(e) the value of the marginal product of labor in food production rises.
Answer: (a)

16

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17

10. In a specific factors framework with labor as the mobile factor, immigration will
(a) increase wages and reduce the returns to the specific factors.
(b) decrease wages and reduce the returns to the specific factors.
(c) increase wages and not change the returns to the specific factors.
(d) decrease wages and reduce the returns to one specific factor and raise the return to the other.
(e) decrease wages and increase the returns to the specific factors.
Answer: (e)
11. In a specific factors framework with labor as the mobile factor, an increase in the capital stock will
(a) increase the return to capital and increase wages.
(b) increase the return to capital and decrease wages.
(c) decrease the return to capital and decrease wages.
(d) decrease the return to capital and increase wages.
(e) not change the return to capital.
Answer: (d)
12. In a specific factors framework with labor as the mobile factor and land as the factor specific to the
food sector, an increase in food prices will
(a) cause labor to move to the clothing sector.
(b) create unemployment.
(c) cause labor to move out of the food sector.
(d) cause labor to move to the food sector.
(e) decrease wages.
Answer: (d)
13. In a specific factors framework with labor as the mobile factor and capital as the factor specific to the
clothing sector, which of the following is a possible result of a 10 percent increase in clothing prices?
(a) Returns to capital rise by 15 percent; wages rise by 8 percent and the return to land falls by
2 percent.
(b) Returns to capital rise by 8 percent; wages fall by 2 percent and the return to land rises by
15 percent.
(c) Returns to capital fall by 2 percent; wages rise by 15 percent and the return to land rises by
8 percent.
(d) Wages do not change, and the return to both capital and land rises by 12 percent.
(e) Returns to capital fall by 15 percent; wages rise by 15 percent and the return to land falls by
15 percent.
Answer: (a)
14. Assuming workers consume primarily the import good, labor will allocate large resources to lobby
with the specific factor used in the import competing sector to
(a) reduce the endowment of labor (allow emigration) in order to raise wages.
(b) reduce tariffs on imports.
(c) increase tariffs on imports.
(d) decrease the endowment of the specific capital used in the export sector.
(e) none of the above.
Answer: (e)

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15. In the specific factors framework, a 15 percent increase in the return to land and a 2 percent increase
in the wage rate could be the result of
(a) an 8 percent increase in the price of food.
(b) an 8 percent decrease in the price of food.
(c) a 17 percent increase in the price of food.
(d) a decrease in the price of clothing.
(e) an increase in the price of clothing.
Answer: (a)
16. In a specific factors framework with labor as the mobile factor, capitalists will promote policies that
(a) increase prices of goods that use capital in production.
(b) reduce the amount of available land.
(c) increase the labor supply.
(d) decrease prices of goods that use land in production.
(e) all of the above.
Answer: (e)
17. In a specific factors framework, the Dutch Disease occurs when
(a) a boom in one sector decreases wages, creating unemployment.
(b) a boom in one sector increases wages, lowering profits in some other sectors.
(c) a boom in one sector decreases wages, raising profits in some other sectors.
(d) a boom in one sector leads to the destruction of other sectors.
(e) a boom in one sector reduces the return to the factor specific to that sector.
Answer: (b)
18. With non-traded goods, a boom in an export sector (assuming labor is mobile across sectors) without
a shift in demand will
(a) decrease wages and decrease prices of non-traded goods.
(b) increase wages and increase prices of non-traded goods.
(c) increase wages and decrease prices of non-traded goods.
(d) decrease wages and increase prices of non-traded goods.
(e) increase wages and not affect prices of non-traded goods.
Answer: (b)
19. If the price of clothing decreases by 10 percent, which of the following could occur?
(a) All rates of return and wages in the economy fall since the price of some outputs has fallen.
(b) The return to capital decreases by less than 10 percent, wages fall by more than 10 percent and
the rental rate on land rises.
(c) The return to capital decreases by more than 10 percent, wages fall by less than 10 percent and
the rental rate on land rises.
(d) The return to capital decreases by more than 10 percent, wages and the rental rate on land rise.
(e) None of the above.
Answer: (c)

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20. Which of the following groups is most likely to oppose immigration into the US?
(a) US capitalists
(b) US landowners
(c) US workers
(d) all of the above are equally likely to be opposed to immigration
(e) both (a) and (b)
Answer: (c)
1.

In a Heckscher-Ohlin framework, the home country has 100 units of labor and the foreign has 200.
Which of the following is necessarily true?
(a) Home is relatively labor-abundant.
(b) Foreign is relatively labor-abundant.
(c) Home is relatively capital-abundant.
(d) Foreign is relatively capital-abundant.
(e) None of the above.
Answer: (e)

2.

Consider two countries with the same technology and factor endowment proportions close together.
If factor prices are equalized across the two countries, the relatively labor-abundant country must
(a) have a higher real wage rate.
(b) export more of the labor-intensive good.
(c) import more of the labor-intensive good.
(d) produce more of the labor-intensive good.
(e) (b) and (d).
Answer: (d)

3.

In a Heckscher-Ohlin framework with flexible technology, which of the following is true?

(a) Factor returns will be equalized with trade.
(b) The capital-abundant country will generally export the capital-intensive good.
(c) The wage to rent ratio will be higher in the capital-abundant country.
(d) None of the above.
(e) All of the above.
Answer: (b)

4.

In a Heckscher-Ohlin framework with clothing as the capital-intensive good, an increase in the price
of clothing will generally result in
(a) wages increasing, returns to capital decreasing.
(b) wages increasing, returns to capital increasing.
(c) wages decreasing, returns to capital decreasing.
(d) wages decreasing, returns to capital increasing.
(e) wages unchanged, returns to capital increasing.
Answer: (d)

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20

In a Heckscher-Ohlin framework with clothing the capital-intensive good, a 20% increase in the price
of clothing could induce
(a) an increase in the rental rate of more than 20% and a fall in the wage rate.
(b) a fall in the rental rate and an increase in the wage rate of less than 20%.
(c) a fall in the rental rate and an increase in the wage rate of more that 20%.
(d) an increase in both the rental and wage rates.
(e) an increase in the rental rate of less than 20% and a fall in the wage rate of more than 20%.
Answer: (a)

Questions 610 concern the following situation:

Technology is the same across countries. The inputs necessary for production are fixed and it requires
2 units of labor and 1 unit of capital to make a unit of food. To make a unit of clothing, it requires 1 unit of
labor and 4 units of capital. The home country has 200 units of labor and 200 units of capital. The foreign
country has 100 units of labor and 200 units of capital.
6.

Which of the following is true?

(a) Food production is labor-intensive and the foreign country is relatively labor-abundant.
(b) Food production is labor-intensive and the home country is relatively labor-abundant.
(c) Food production is capital-intensive and the home country is relatively labor-abundant.
(d) Food production is capital-intensive and the home country is relatively capital-abundant.
(e) The home country is neither relatively capital-abundant nor relatively labor-abundant.
Answer: (b)

7.

If in autarky, clothing costs $3 at home and food costs $1 at home then what is the home return to
capital?
(a) 1
(b) 2/7
(c) 3/4
(d) 5/7
(e) 2
Answer: (d)

8.

In a Heckscher-Ohlin framework with food the labor-intensive good, a 10% increase in the wage rate
is most likely caused by
(a) an increase in the price of clothing of less than 10%.
(b) an increase in the price of clothing of more than 10%.
(c) an increase in the price of food of more than 10%.
(d) an increase in the rental rate on capital.
(e) an increase in the price of food of less than 10%.
Answer: (e)

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If in autarky, foreign wages are $1 and the return to capital is also $1, what are foreign autarky
prices?
(a) food $4, clothing $5
(b) food $2, clothing $5
(c) food $3, clothing $4
(d) food $3, clothing $5
(e) food $6, clothing $4
Answer: (d)

10. If in autarky, the home price of food was $1, the home clothing price was $3, the foreign price of
food was $3 and the foreign clothing price was $5, then the following gain from trade:
(a) home capitalists, foreign laborers.
(b) home laborers, foreign capitalists.
(c) only home laborers.
(d) laborers in both countries.
(e) capitalists in both countries.
Answer: (b)
11. In a Heckscher-Ohlin framework with clothing as the capital-intensive good and fixed coefficient
technology, capitalists would tend to encourage policies that
(a) increase the price of capital-intensive goods.
(b) promote immigration.
(c) decrease the amount of capital in use.
(d) increase the price of all goods by an equal amount.
(e) all of the above.
Answer: (a)
12. Consider a Heckscher-Ohlin framework with clothing as the capital-intensive good where the home
country imports food. A tariff on imports of food will be encouraged by
(a) home capitalists.
(b) home labor.
(c) foreign capitalists.
(d) both (b) and (c).
(e) all of the above.
Answer: (b)
13. The Leontief paradox is based on the observation that
(a) the US is relatively capital-abundant, but US exports tend to be relatively capital-intensive.
(b) the US is relatively capital-abundant, but US imports tend to be relatively capital-intensive.
(c) the US is relatively labor-abundant, but US imports tend to be relatively capital-intensive.
(d) the US is relatively labor-abundant, but US imports tend to be relatively labor-intensive.
(e) factor prices are not equalized between the US and its major trading partners.
Answer: (b)

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22

14. The increase in the differential between the hourly earnings of skilled and unskilled labor can be
explained by
(a) increasing imports intensive in their use of low-skill workers.
(b) shifts in demand away from low-skill manufactures.
(c) labor-saving technology shifts.
(d) immigration of low-skill workers.
(e) all of the above.
Answer: (e)
15. In the production box diagram used to illustrate the Heckscher-Ohlin model of trade, the slopes of
lines from the origin to points on the contract curve represent
(a) relative output prices.
(b) relative factor prices.
(c) relative factor intensities.
(d) relative resource endowments.
(e) none of the above.
Answer: (c)
16. If clothing production is relatively labor-intensive, and the home country is relatively labor-abundant,
then with free trade (assume the home and foreign countries are of equal size),
(a) the home country will produce more clothing varieties than the foreign.
(b) the home country will produce more clothing varieties than they did under autarky and the
foreign will produce less.
(c) clothing firms will be smaller in the home country.
(d) the production pattern will be the same as it was in autarky.
(e) food producing firms will be smaller in the foreign country.
Answer: (a)
17. Unit value isoquants represent
(a) combinations of inputs that produce one unit of output.
(b) technologies that produce one unit of output.
(c) prices of goods.
(d) combinations of inputs that produce one dollar of output.
(e) none of the above.
Answer: (d)
18. If the price of a good increases, the unit value isoquant for the production of that good
(a) becomes more curved.
(b) shifts outward.
(c) shifts upwards.
(d) shifts right.
(e) none of the above.
Answer: (e)

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19. In Heckscher-Ohlin model with many goods, trade allows countries to

(a) produce goods whose relative factor requirements are different from the countries
relative factor endowments.
(b) concentrate production in a few goods whose relative factor requirements are similar to the
countries relative factor endowments.
(c) produce more goods than it could in autarky.
(d) produce goods whose production costs are above the production costs in the rest of
the world.
(e) none of the above.
Answer: (b)
20. An increase in the world price of clothing results in
(a) higherprofits forclothing producers.
(b) fewer countries producing clothing.
(c) a taste shift towards clothing.
(d) clothing being produced in a larger number of countries.
(e) none of the above.
Answer: (d)
21. It is observed that a country in a trading world is producing only one good. An increase in the world
price of that good will
(a) raise wages and lower the return to capital.
(b) raise the return to capital and lower wages.
(c) increase profits for firms in that country.
(d) not change wages and the return to capital.
(e) raise both wages and the return to capital.
Answer: (e)
22. In a Heckscher-Ohlin trading world where there are many countries and many goods, which of the
following must be true?
(a) Factor prices will be equalized across countries.
(b) The country with the most labor will produce the most labor-intensive good.
(c) Larger countries will produce more goods.
(d) All of the above.
(e) None of the above.
Answer: (e)
23. Assume a Hecksher-Ohlin world with many countries and free trade. If countries have similar tastes,
factor intensities in a countrys aggregate consumption bundle reflect
(a) average world factor endowments.
(b) the countrys factor endowment.
(c) the factor endowment of the countrys exports.
(d) none of the above.
(e) all of the above.
Answer: (a)

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24. The Heckscher-Ohlin model can be viewed as

(a) a framework in which intra-industry trade can be incorporated.
(b) a model which the prevalence of intra-industry trade refutes.
(c) a long-run Specific-Factors model where overtime all factors become essentially mobile and can
be reallocated across sectors.
(d) a short-run Specific-Factors model where in short periods of time factors are not mobile across
sectors.
(e) (a) and (c).
Answer: (c)
25. In a two-country Heckscher-Ohlin model, growth in country As (but not Bs) physical and human
capital leads to
(a) higher real wage rates in A.
(b) changes in which goods B has a comparative advantage.
(c) changes in which goods A has a comparative advantage.
(d) changes in country As factor prices.
(e) all of the above.
Answer: (e)
1.

We are more likely to observe intra-industry trade in

(a) industries with complex and highly differentiated goods.
(b) industries with increasing returns in production.
(c) goods in which consumers value variety.
(d) goods in which a country possesses neither a clear advantage nor disadvantage in production.
(e) all of the above.
Answer: (e)

2.

If a country exports 300 units of food and imports 200 units of food, then its index of intra-industry
trade in food would be
(a) 0.2.
(b) 0.4.
(c) 0.5.
(d) 0.6.
(e) 0.8.
Answer: (e)

3.

Between 1964 and 1985 intra-industry trade has risen by about

(a) 1/10.
(b) 1/4.
(c) 1/3.
(d) 1/2.
(e) 2/3.
Answer: (c)

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Intra-industry trade is most prevalent in what type of goods?

(a) agricultural products
(b) simple, homogeneous goods
(c) manufactured goods
(d) complex, differentiated goods
(e) natural resources
Answer: (d)

5.

Increasing returns to scale imply that a doubling of all inputs results in

(a) less than double the output.
(b) a doubling of the unit cost of production.
(c) exactly double the amount of output.
(d) lower profits for firms.
(e) less than double production costs.
Answer: (e)

6.

If there were increasing returns to scale and no product variety, then

(a) firms profits would be negative.
(b) all production would be in one good.
(c) the country would produce an infinite number of products.
(d) unit production costs would be zero.
(e) none of the above.
Answer: (b)

7.

If a monopolistic competitive firm unilaterally raises its price a small amount, then
(a) its profit falls to zero.
(b) sales of its product will fall to zero.
(c) its profits become infinite.
(d) sales of its product will rise.
(e) its sales fall, but not to zero.
Answer: (e)

8.

Tangency of average cost and average revenue in monopolistic competitive markets imply that
firms profits are
(a) dependent solely upon costs.
(b) increasing as more firms produce varieties.
(c) zero.
(d) equal to the difference between average revenue and marginal cost.
(e) none of the above
Answer: (c)

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26

As market size expands, firm size expands as a result of

(a) a decline in the number of products.
(b) a lack of close substitutes in demand.
(c) demand becoming more elastic.
(d) average production costs increasing.
(e) all of the above.
Answer: (c)

10. In autarky, two countries share a common technology, markets are monopolistic competition, and the
home market is larger than the foreign. Then
(a) there will be more foreign firms and they will be larger than home firms.
(b) there will be fewer foreign firms and they will be larger than home firms.
(c) there will be more foreign firms and they will be smaller than home firms.
(d) profits will be higher for home firms than foreign firms.
(e) none of the above.
Answer: (e)
11. If clothing production is relatively labor intensive, and the home country is relatively labor abundant,
then with free trade (assume the home and foreign countries are of equal size),
(a) the home country will produce more clothing varieties than the foreign.
(b) the home country will produce more clothing varieties than they did under autarky and the
foreign will produce less.
(c) clothing firms will be smaller in the home country.
(d) the production pattern will be the same as it was in autarky.
(e) food producing firms will be smaller in the foreign country.
Answer: (a)
12. In the presence of scale economies, trade (that does not change the number of varieties
of goods produced) will
(a) shift a countrys production possibilities frontier outwards.
(b) shift a countrys indifference curves outwards.
(c) shift a countrys indifference curves inwards.
(d) cause a countrys production possibilities frontier to become bowed inwards.
(e) shift a countrys production possibilities frontier inwards.
Answer: (a)
13. All of the following are sources of gains from trade except
(a) increased product variety in consumption.
(b) production of goods in which a country has a comparative advantage.
(c) concentration of production in fewer varieties of goods.
(d) allowing a country to produce beyond its PPF.
(e) learning about new technology from abroad.
Answer: (d)

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14. In autarky a country produces many varieties of food. Opening up to trade can improve its welfare by
allowing it to
(a) concentrate its production in fewer varieties of food.
(b) reallocate production between food and clothing according to world prices.
(c) consume a different combination of goods that it produces.
(d) (a) and (b) only.
(e) (a), (b) and (c).
Answer: (e)
15. In autarky, a country produces a number of varieties of an aggregate good. Trade will
(a)
(b)
(c)
(d)
(e)

increase the number of varieties produced.

increase production of all varieties, but keep the same number of varieties.
decrease production of all varieties, but keep the same number of varieties.
decrease the number of varieties produced.
decrease production of some varieties, increase production of others, but keep the same number
of varieties.
Answer: (d)
16. For two nations that are trading food and clothing, the addition of variety
(a)
(b)
(c)
(d)

can only improve real incomes if the nations differ in terms of their initial endowments
can only improve real incomes if the nations engage in inter-industry trade
can improve real incomes if the nations engage in intra-industry trade
can only improve real incomes if the nations export the good in which it has a comparative
advantage
(e) all of the above
Answer: (c)
17. Producers are affected by intra-industry trade in which of the following ways?
(a) face greater competition
(b) number of firms producing the good is reduced
(c) each firm becomes larger
(d) all of the above
(e) none of the above
Answer: (d)
18. The transformation curve can shift out with an intra-industry trade due to:
(a) more efficient use of inputs
(b) increasing returns to scale
(c) an improvement in real income
(d) the nation producing the good in which it has a comparative advantage
(e) the transformation curve cannot shift out due to trade
Answer: (b)

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19. How does trade affect a monopolistically competitive firm?

(a) the elasticity of demand that it faces increases
(b) the elasticity of demand that it faces decreases
(c) it increases its potential for long-run profit
(d) profits will no longer be maximized when marginal revenue equals marginal cost
(e) it will no longer be able to maximize its profit
Answer: (a)
20. Increasing returns can best be described as
(a) increasing output given the same inputs
(b) producing a greater variety of goods due to intra-industry trade
(c) marginal cost declining as output increases
(d) increased profitability resulting from increased trade
(e) doubling of inputs resulting in more than doubling of output
Answer: (e)
1.

Footloose industries are generally characterized by

(a) high skill requirements.
(b) simple assembly.
(c) imported raw materials.
(d) all of the above.
(e) (b) and (c).
Answer: (e)

2.

Developing countries tend to export products that

(a) use a lot of capital.
(b) use large amounts of natural resources.
(c) have low value added per worker in the US.
(d) are near the beginning of the product cycle.
(e) none of the above.
Answer: (c)

3.

Innovative goods are generally

(a) produced in low income countries.
(b) produced using capital intensive technology.
(c) mass produced.
(d) produced with skilled labor.
(e) produced in high income countries over the entire life of the product.
Answer: (d)

Questions 49 refer to a situation where production is Ricardian in nature. Food is produced by labor
alone, with the home country requiring 2 units of labor per unit of food and the foreign requiring only 1.
Clothing is produced with labor and an international footloose factor. Both the home and foreign country
require 1 unit of labor per unit of clothing. The home country requires 2 units of the footloose factor and
the foreign requires 3 per unit of clothing. The world price of food is $1.

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4.

The Gains from Trade

Which of the following describes this situation?

(a) The foreign country has comparative advantage in labor costs and the home country has
an absolute advantage in attracting the footloose input.
(b) The foreign country has comparative advantage in labor costs and absolute advantage
in attracting the footloose input.
(c) The home country has a comparative advantage in labor costs and an absolute advantage
in attracting the footloose input.
(d) The home country has a comparative advantage in labor costs and the foreign country has
an absolute advantage in attracting the footloose input.
(e) None of the above.
Answer: (a)

5.

If the world clothing price is $2, what is the most the home country can offer the footloose factor?
(a) $0.50
(b) $0.75
(c) $1
(d) $1.50
(e) $1.75
Answer: (b)

6.

If the world price of clothing is $2, and the footloose factor requires $0.50 to be attracted, then
(a) neither country attracts the footloose factor.
(b) home produces food and the foreign country produces both goods.
(c) both countries produce some clothing.
(d) home produces both goods and the foreign country produces food.
(e) the home wage rate will be higher than the foreign.
Answer: (d)

7.

If the world price of clothing is $2, and the return to the fixed factor is $0.50, then the home wage
rate will be
(a) $1.00
(b) $0.75
(c) $0.50
(d) $1.25
(e) $1.50
Answer: (a)

8.

If the world price of clothing rises from $2 to $3, and the return to the fixed factor remains at $0.50,
then
(a) wages in both countries will fall.
(b) the amount that can be offered to the footloose factor will fall at home.
(c) there will be no change in wages in either country.
(d) the foreign country will be able to offer a greater return to the footloose factor.
(e) the amount that can be offered to the footloose factor and wages will both rise at home.
Answer: (e)

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9.

The Gains from Trade

If home productivity in food rises to one unit of labor per 2 units of food, then at a world price
of clothing of $2,
(a) the footloose factor will not be affected.
(b) home wages will fall.
(c) home production of clothing will expand.
(d) the footloose factor will be attracted to the foreign country.
(e) the home country can offer the footloose factor at most $0.25.
Answer: (d)

10. Fragmentation of production is most evident by

(a) production of services as opposed to goods
(b) increases in intra-industry trade
(c) increases in inter-industry trade
(d) increased trade in intermediate goods
(e) more industries being characterized by monopolistic competition
Answer: (d)
11. Which of the following is an example of a service link associated with outsourcing?
(a) transportation
(b) insurance
(c) communication
(d) all of the above
(e) none of the above
Answer: (d)
12. Most service link areas tend to exhibit
(a) increasing returns
(b) decreasing returns
(c) constant returns
(d) high variable costs
(e) no fixed costs
Answer: (a)
13. Outsourcing will become more prevelant as
(a) coordination costs tend to rise as output increases
(b) reductions in average costs increasingly exceed coordination costs
(c) in industries characterized by decreasing returns
(d) marginal costs rise due to increased product fragmentation
(e) none of the above
Answer: (b)

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31

14. Outsourcing has become more common in recent years due to

(a) reductions in the cost of service link activities
(b) reductions in wages in less developed countries
(c) increases in barriers to trade
(d) higher costs of capital in advanced countries
(e) the amount of outsourcing has remained stable for decades
Answer: (a)
15. Which of the following increased the fastest in the 1990s?
(a) world GDP
(b) world trade
(c) trade in parts and components
(d) intra-industry trade
(e) all of the above have increased at a similar rate
Answer: (c)
16. Firms consider which of the following when deciding whether to outsource part of production?
(a) relative wages
(b) infrastructure
(c) relative productivity
(d) all of the above
(e) none of the above
Answer: (d)
17. Inputs that are internationally mobile will seek to be used in countries where
(a) costs are low
(b) returns are maximized
(c) productivity is low
(d) they have a comparative advantage
(e) increasing returns exist
Answer: (b)
18. Which of the following statements best describes the status of outsourcing in the US?
(a) economists generally agree that outsourcing has reduced average wages of US workers
(b) economists generally agree that outsourcing has led to a net decline in the number of jobs in the US
(c) there is some evidence that the number of jobs created by insourcing exceeds those directly lost
by outsourcing
(d) outsourcing has become less common in recent years
(e) outsourcing has reduced the standard of living of the average American
Answer: (c)

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19. International trade in parts and components has increased rapidly in recent decades due to
(a) rising incomes leading to larger scales of output
(b) significant reductions in the costs of serivce link activities
(c) steady reductions in barriers to trade
(d) freeing up of domestic restrictions on service activities
(e) all of the above
Answer: (e)
20. Which of the following would be least likely to be outsourced by a firm in an advanced economy?
(a) research and development
(b) furniture production
(c) footwear production
(d) textile production
(e) assembling of manufactured products
Answer: (a)

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