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1、Review Questions and Problems for Chapter 3,a.Increasing opportunity costs arise because resources or factors of production are not homogeneous(i.e.,all units of the same factor are not identical or of the same quality)and not used in the same fixed proportion or intensity in the production of all c
2、ommodities.This means that as the nation produces more of a commodity,it must utilize resources that become progressively less efficient or less suited for the production of that commodity.As a result,the nation must give up more and more of the second commodity to release just enough resources to p
3、roduce each additional unit of the first commodity(i.e.,it faces increasing costs).b.In the real world,the production frontiers of different nations will usually differ because ofdifferences in factor endowments and technology.,Answer to Review Questions and Problems,2.a.See the following figure.,b.
4、The slope of the transformation curve increases as the nation produces more of X and decreases as the nation produces more of Y.These reflect increasing opportunity costs asthe nation produces more of X or Y.,Answer to Review Questions and Problems,3.a.See the following figure.,b.Nation 1 has a comp
5、arative advantage in X and Nation 2 in Y.c.If the relative commodity price line in autarky has equal slope in both nations.This is rare.,Answer to Review Questions and Problems,4.a.See following Figure3.Points B and B are the production points in Nations 1 and 2,respectively,with specialization and
6、trade and E and E are the consumption points.,Answer to Review Questions and Problems,5.a.The equilibrium-relative commodity price in isolation is the relative price that prevails in the nation without trade or in autarky.b.The equilibrium-relative commodity price in isolation for the commodity plot
7、ted along the horizontal axis is given by the(absolute)slope of the tangent of the production frontier andthe community indifference curve at the point of production and consumption in the nation in isolation.c.The nation with the lower equilibrium relative commodity price in isolation or autarky ha
8、s a comparative advantage in the commodity measured along the commodity axis and acomparative disadvantage in the commodity measured along the vertical axis.,Answer to Review Questions and Problems,6.See Figure following.,Answer to Review Questions and Problems,7.a.The reason for incomplete speciali
9、zation under increasing costs is that as each nation specializes in the production of the commodity of its comparative advantage,the relative commodity price in each nation moves toward each other(i.e.,become less unequal)until they are identical in both nations.At that point,it does not pay for eit
10、her nation to continue to expand the production of the commodity of its initial comparative advantage.This occurs before either nation has completely specialized in production.b.Under constant costs,each nation specializes completely in production of the commodity of its comparative advantage(i.e.,p
11、roduces only that commodity).The reason is that since it pays for the nation to obtain some of the commodity of its comparative disadvantage from the other nation,then it pays for the nation to get all of the commodity of its comparativedisadvantage from the other nation(i.e.,to specialize completel
12、y in the production of the commodity of its comparative advantage).,Answer to Review Questions and Problems,8.See Figure following.Nations 1 and 2 have identical production frontiers(shown by a single curve)but differenttastes(indifference curves).In isolation,Nation 1 produces and consumes at point
13、 A and Nation 2 at point A.Since PA PA,Nation 1 has a comparative advantage in X and Nation 2 in Y.,Answer to Review Questions and Problems,9.a.If the terms of trade of a nation improved from 100 to 110 over a given period of time,the terms of trade of the trade partner would deteriorate by about 9
14、percent over the same period of time(100-110)/110=-0.09=0.9%.b.A deterioration in the terms of trade of the trade partner can be said to be unfavorable to the trade partner because the trade partner must pay a higher price for its imports in terms of its exports.c.This does not necessarily mean that
15、 the welfare of the trade partner has decreased because the deterioration in its terms of trade may have resulted from an increase in productivity that is shared with the other nation.,Answer to Review Questions and Problems,10.It is true that Mexicos wages are much lower than U.S.wages(they are abo
16、ut one fifth of theaverage wage in the United States),but labor productivity is much higher in the United Statesand so labor costs are not necessarily higher than in Mexico.In any event,trade can still bebased on comparative advantage.,Multiple-Choice Questions,1.A production frontier that is concav
17、e indicates that the nation incurs increasing opportunity costs in the production of:modity X modity Y onlyc.both commoditiesd.neither commodity,2.The marginal rate of transformation(MRT)of X for Y refers to:a.the amount of Y that a nation must give up to produce each additional unit of Xb.the oppor
18、tunity cost of Xc.the absolute slope of the production frontier at the point of productiond.all of the above,Answer to Review Questions and Problems,3.Which of the following is not a reason for increasing opportunity costs:a.technology differs among nationsb.factors of production are not homogeneous
19、c.factors of production are not used in the same fixed proportion in the production of allcommoditiesd.for the nation to produce more of a commodity,it must use resources that are less andless suited in the production of the commodity,Answer to Review Questions and Problems,4.Community indifference
20、curves:a.are negatively slopedb.are convex to the originc.should not crossd.all of the above,5.Which of the following statements is true with respect to the MRS of X for Y?a.it is given by the absolute slope of the indifference curveb.declines as the nation moves down an indifference curvec.rises as
21、 the nation moves up an indifference curved.all of the above,Answer to Review Questions and Problems,6.The marginal rate of substitution(MRS)of X for Y in consumption refers to the:a.amount of X that a nation must give up for one extra unit of Y and still remain on thesame indifference curveb.amount
22、 of Y that a nation must give up for one extra unit of X and still remain on the same indifference curveb.amount of X that a nation must give up for one extra unit of Y to reach a higher indifference curvec.amount of Y that a nation must give up for one extra unit of X to reach a higher indifference
23、 curve,Answer to Review Questions and Problems,7.Which of the following is not true for a nation that is in equilibrium in isolation?a.it consumes inside its production frontierb.it reaches the highest indifference curve possible with its production frontierc.the indifference curve is tangent to the
24、 nations production frontierd.MRT of X for Y equals MRS of X for Y,and they are equal to Px/Py,Answer to Review Questions and Problems,8.If the internal Px/Py is lower in nation 1 than in nation 2 without trade:a.nation 1 has a comparative advantage in commodity Yb.nation 2 has a comparative advanta
25、ge in commodity Xc.nation 2 has a comparative advantage in commodity Yd.none of the above,9.If actual Px/Py exceeds the equilibrium relative Px/Py with tradea.the nation exporting commodity X will want to export more of X than at equilibriumb.the nation importing commodity X will want to import less
26、 of X than at equilibriumc.Px/Py will fall toward the equilibrium Px/Pyd.all of the above,Answer to Review Questions and Problems,10.With free trade under increasing costs:a.neither nation will specialize completely in production if both nations are largeb.at least one nation will consume above its
27、production frontierc.a small nation will always gain from traded.all of the above,11.Which of the following statements is true?a.a nations demand curve of a commodity is derived from production points on the nations production frontier.b.a nations supply curve for a commodity is derived from communi
28、ty indifference curves and trade linesc.the price of the nations import commodity will fall as a result of international traded.none of the above,Answer to Review Questions and Problems,12.At a relative commodity price above equilibriuma.the quantity demand of imports exceeds the quantity supplied o
29、f exportsb.the relative price of the commodity will risec.the commodity price will falld.none of the above,13.If the terms of trade increase in a two-nation world,those of the trade partner:a.deteriorateb.improvec.remain unchangedd.any of the above,Answer to Review Questions and Problems,14.A deteri
30、oration of a nations terms of trade causes the nations welfare to:a.deteriorateb.improvec.remain unchangedd.any of the above,15.Mutually beneficial trade cannot occur if production frontiers are:a.equal but tastes are notb.different but tastes are the samec.different and tastes are also differentd.t
31、he same and tastes are also the same.,Answers to Review Questions and Problems for Chapter four,1.a.The HeckscherOhlin(H-0)theorem postulates that a nation will export those commoditieswhose production requires the intensive use of the nations relatively abundant andcheap factor and import the commo
32、dities whose production requires the intensive useof the nations relatively scarce and expensive factor.In short,the relatively labor-richnation exports relatively labor-intensive commodities and imports the relativelycapital-intensive commodities.,b.Heckscher and Ohlin identify the relative differe
33、nce in factor endowments amongnations as the basic determinant of comparative advantage and international trade.c.The H-O Theory represent an extension of the standard trade model because it explainsthe basis for comparative advantage(classical economists,such as Ricardo had assumedit)and examines t
34、he effect of international trade on factor prices and income distribution(which classical economists had left unanswered).,Answers to Review Questions and Problems,2.See the following Figure,Answers to Review Questions and Problems,9.See the following Figure,Answers to Review Questions and Problems,
35、Multiple-Choice Questions,Answers to Review Questions and Problems,1.The H-O model extends the classical trade model by:a.explaining the basis for comparative advantageb.examining the effect of trade on factor pricesc.both a and bd.neither a nor b,2.A nation is said to have a relative abundance of K
36、 if it has a:a.greater absolute amount of Kb.smaller absolute amount of Lc.higher L/K ratiod.lower price of K in relation to the price of L,Answers to Review Questions and Problems,3.A difference in relative commodity prices between nations can be based on a difference in:a.technologyb.factor endowm
37、entsc.tastesd.all of the above,Answers to Review Questions and Problems,4.In the H-O model,international trade is based mostly on a difference in:a.technologyb.factor endowmentsc.economies of scaled.tastes,Answers to Review Questions and Problems,5.According to the H-O theory,trade reduces internati
38、onal differences in:modity pricesb.in factor pricesc.both commodity and factor pricesd.neither relative nor absolute factor prices,Answers to Review Questions and Problems,6.According to the Stolper-Samuelson theorem,international trade leads toa.reduction in the real income of the nations relativel
39、y abundant factorb.reduction in the real income of the nations relatively scarce factorc.increase in the real income of the nations relatively scarce factord.none of the above,Answers to Review Questions and Problems,7.Which of the following is false with regard to the specific factors theorem,inter
40、national tradea.harms the immobile factors that are specific to the nations export commodities or sectorsb.harms the immobile factors that are specific to the nations import-competing commoditiesc.has an ambiguous effect on the nations mobile factorsd.may benefit or harm the nations mobile factors,A
41、nswers to Review Questions and Problems,8.Perfect international mobility of factors of productiona.leads to a reduction in international differences in the returns to homogenous factorsb.acts as a substitute for international trade in its effects on factor pricesc.operates on the supply of factors i
42、n affecting factor pricesd.all of the above,Answers to Review Questions and Problems,9.The Leontief paradox refers to the empirical finding that U.S.a.import substitutes were more K-intensive than exportsb.exports were more L-intensive than importsc.exports were more K-intensive than import substitu
43、tesd.all of the above,Answers to Review Questions and Problems,10.From empirical studies,we onclude that the H-O theory:a.must be rejectedb.must be accepted without reservationsc.can generally be acceptedd.explains all international trade,Answers to Review Questions and Problems,11.International tra
44、de can be based on economies of scale even if both nations have identical:a.factor endowmentsb.tastesc.technologyd.all of the above,Answers to Review Questions and Problems,12.A great deal of international trade:a.is intra-industry tradeb.involves differentiated productsc.is based on monopolistic co
45、mpetitiond.all of the above,Answers to Review Questions and Problems,Answer to Problems for Chapter 5,1.a.See following Figure 1,b.Consumption is 70X,production is 50X and imports are 20X.c.The consumption effect is 30X,the production effect is+30X,the trade effect is 60X,and the revenue effect is$3
46、0,Answer to Problems,2.a.The consumer surplus is$250 without and$l22.50 with the tariff(see above Figure).b.Of the increase in the revenue of producers with the tariff(as compared with theirrevenues under free trade),$22.50 represents the increase in production costs andanother$22.50 represents the
47、increase in rent or producer surplus(see above Figure).c.The dollar value or the protection cost of the tariff is$45(see above Figure).,Answer to Problems,3.see following Figure,Answer to Problems,4.see following Figure,Answer to Problems,5.The optimum tariff is the tariff that maximizes the net ben
48、efit resulting from the improvement in the nations terms of trade against the negative effect resulting from reduction in the volume of trade.,Answer to Problems,6.a.When a nation imposes an optimum tariff,the trade partners welfare declines because of the lower volume of trade and the deterioration
49、 in its terms of trade.b.The trade partner is likely to retaliate and in the end both nations are likely to lose because of the reduction in the volume of trade.,Answer to Problems,7.Even when the trade partner does not retaliate when one nation imposes the optimum tariff,the gains of the tariff-imp
50、osing nation are less than the losses of the trade partner,so that the world as a whole is worse off than under free trade.It is in this sense that free trade maximizes world welfare.,Answer to Problems,8.a.The nominal tariff is calculated on the market price of the product or service.The rate of ef
