University Of California|Econ-IS 13 Homework 2 .LATEST SOLUTION

____ 1. The nation of Pineland forbids international trade. In Pineland, you can buy 1 pound of fish for 2 pounds of pineapples. In other countries, you can buy 1 pound of fish for 1.5 pounds of pineapples. These facts indicate that a. Pineland has a comparative advantage, relative to other countries, in producing fish. b. other countries have a comparative advantage, relative to Pineland, in producing pineapples. c. the price of pineapples in Pineland exceeds the world price of pineapples. d. if Pineland were to allow trade, it would import fish. ____ 2. The price of sugar that prevails in international markets is called the a. export price of sugar. b. import price of sugar. c. comparative-advantage price of sugar. d. world price of sugar. ____ 3. If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price, a. the country will be an exporter of the good. b. the country will be an importer of the good. c. the country will be neither an exporter nor an importer of the good. d. Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither. ____ 4. Assume, for Canada, that the domestic price of tomatoes without international trade is higher than the world price of tomatoes. This suggests that, in the production of tomatoes, a. Canada has a comparative advantage over other countries and Canada will export tomatoes. b. Canada has a comparative advantage over other countries and Canada will import tomatoes. c. other countries have a comparative advantage over Canada and Canada will export tomatoes. d. other countries have a comparative advantage over Canada and Canada will import tomatoes. ____ 5. When a country that imported a particular good abandons a free-trade policy and adopts a no-trade policy, a. producer surplus increases and total surplus increases in the market for that good. b. producer surplus increases and total surplus decreases in the market for that good. c. producer surplus decreases and total surplus increases in the market for that good. d. producer surplus decreases and total surplus decreases in the market for that good. Figure 9-1 The figure illustrates the market for wool in Scotland. ____ 6. Refer to Figure 9-1. From the figure it is apparent that a. Scotland will experience a shortage of wool if trade is not allowed. b. Scotland will experience a surplus of wool if trade is not allowed. c. Scotland has a comparative advantage in producing wool, relative to the rest of the world. d. foreign countries have a comparative advantage in producing wool, relative to Scotland. ____ 7. Refer to Figure 9-1. With trade, total surplus in the Scotland wool market amounts to a. 312.5. b. 367.0. c. 467.5. d. 495.0. Figure 9-2 ____ 8. Refer to Figure 9-2. Without trade, producer surplus is a. $210. b. $245. c. $455. d. $490. ____ 9. Refer to Figure 9-2. With free trade, consumer surplus is a. $45. b. $80. c. $210. d. $245. Scenario 9-1 The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches. ____ 10. Refer to Scenario 9-1. If trade in peaches is allowed, the United States a. will become an importer of peaches. b. will become an exporter of peaches. c. may become either an importer or an exporter of peaches, but this cannot be determined. d. will experience increases in both consumer surplus and producer surplus. Figure 9-13 ____ 11. Refer to Figure 9-13. The price and domestic quantity demanded after trade are a. $8 and 300. b. $8 and 900. c. $14 and 900. d. $14 and 600. ____ 12. A tariff on a product makes a. domestic sellers better off and domestic buyers worse off. b. domestic sellers worse off and domestic buyers worse off. c. domestic sellers better off and domestic buyers better off. d. domestic sellers worse off and domestic buyers better off. ____ 13. A tariff a. lowers the domestic price of the exported good below the world price. b. keeps the domestic price of the exported good the same as the world price. c. raises the domestic price of the imported good above the world price. d. lowers the domestic price of the imported good below the world price. Figure 9-16. The figure below illustrates a tariff. On the graph, Q represents quantity and P represents price. ____ 14. Refer to Figure 9-16. The deadweight loss created by the tariff is represented by the area a. B. b. D F. c. D E F. d. B D E F. ____ 15. When a country abandons a no-trade policy, adopts a free-trade policy, and becomes an exporter of a particular good, a. producer surplus increases and total surplus increases in the market for that good. b. producer surplus increases and total surplus decreases in the market for that good. c. producer surplus decreases and total surplus increases in the market for that good. d. producer surplus decreases and total surplus decreases in the market for that good. ____ 16. A common argument in favor of restricting trade a. concerns the strategy of bargaining. b. is that efforts should be made to get new industries started. c. emphasizes the belief that all countries should play by the same rules. d. All of the above are correct. ____ 17. When an externality is present, the market equilibrium is a. efficient, and the equilibrium maximizes the total benefit to society as a whole. b. efficient, but the equilibrium does not maximize the total benefit to society as a whole. c. inefficient, but the equilibrium maximizes the total benefit to society as a whole. d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole. Figure 10-1 ____ 18. Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates a. positive externalities. b. negative externalities. c. no externalities. d. no equilibrium in the market. Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. Quantity Private Value Private Cost External Cost 1 $14 $10 $2 2 13 11 2 3 12 12 2 4 14 2 6 9 15 2 7 8 16 2 ____ 19. Refer to Table 10-1. What is the equilibrium quantity of output in the market? a. 2 units b. 3 units c. 4 units d. 5 units ____ 20. Refer to Table 10-1. What is the socially-optimal quantity of output in this market? a. 1 unit b. 2 units c. 3 units d. 4 units ____ 21. Which of the following illustrates the concept of a negative externality? a. A college professor plays a vigorous game of racquet ball with the racquet he recently purchased. b. A flood wipes out a farmer's corn crop. c. A college student plays loud music on his new stereo system at 2:00 a.m. d. A janitor eats a hamburger during his lunch break. ____ 22. When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will a. give sellers the incentive to account for the external effects of their actions. b. increase demand. c. increase the amount of the commodity exchanged in market equilibrium. d. restrict the producers' ability to take the costs of the externality into account when deciding how much to supply. ____ 23. A negative externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. exactly the quantity that is socially desirable. d. less than the same market would produce in the presence of a positive externality. ____ 24. A positive externality a. causes the product to be overproduced. b. provides an additional benefit to market participants. c. benefits consumers because it results in a lower equilibrium price. d. is a benefit to a market bystander. ____ 25. Technology spillover is one type of a. negative externality. b. positive externality. c. subsidy. d. producer surplus. Figure 10-9 ____ 26. Refer to Figure 10-9, Panel (c). The market equilibrium quantity is a. Q4, which is the socially optimal quantity. b. Q5, which is the socially optimal quantity. c. Q4, and the socially optimal quantity is Q5. d. Q5, and the socially optimal quantity is Q4. ____ 27. Refer to Figure 10-9. The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is shown in a. Panel (a). b. Panel (b). c. Panel (c). d. Both (b) and (c) are correct. ____ 28. Tradable pollution permits a. have prices that are set by the government. b. will be more valuable to firms that can reduce pollution only at high costs. c. are likely to create a higher level of total pollution. d. are less desirable than corrective taxes in reducing pollution. ____ 29. The Coase theorem states that a. taxes are an efficient way for governments to remedy negative externalities. b. subsidies are an efficient way for governments to remedy positive externalities. c. industrial policies encourage technology spillovers. d. in the absence of transaction costs, private parties can solve the problem of externalities on their own. ____ 30. Last year real GDP in the imaginary nation of Populia was 907.5 billion and the population was 3.3 million. The year before real GDP was 750 billion and the population was 3 million. What was the growth rate of real GDP per person during the year? a. 10 percent b. 14 percent c. 17 percent d. 21 percent ____ 31. Over the last ten years productivity grew faster in Oceania than in Freedonia and the population and total hours worked remained the same in both countries. It follows that a. real GDP per person must be higher in Oceania than in Freedonia. b. real GDP per person grew faster in Oceania than in Freedonia. c. the standard of living must be higher in Oceania than in Freedonia. d. All of the above are correct. ____ 32. Phoenix furniture uses 10 workers, each working eight hours, to produce 80 rocking chairs. What is Phoenix’s productivity? a. 80 rocking chairs b. 10 rocking chairs per hour c. 1 rocking chair per hour d. 1 hour per rocking chair ____ 33. The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce furniture are called a. human capital. b. physical capital. c. natural resources. d. technological knowledge. ____ 34. The slope of the production function with capital per worker on the horizontal axis and output per worker on the vertical axis a. is positive and gets steeper as capital per worker rises. b. is positive and gets flatter as capital per worker rises. c. is negative and gets steeper as capital per worker rises. d. is negative and gets flatter as capital per worker rises. Figure 25-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). ____ 35. Refer to Figure 25-1. The curve becomes flatter as the amount of capital per worker increases because of a. increasing returns to capital. b. increasing returns to labor. c. diminishing returns to capital. d. diminishing returns to labor. ____ 36. In the long run, an increase in the saving rate a. doesn’t change the level of productivity or income. b. raises the levels of both productivity and income. c. raises the level of productivity but not the level of income. d. raises the level of income but not the level of productivity. ____ 37. The logic behind the catch-up effect is that a. workers in countries with low incomes will work more hours than workers in countries with high incomes. b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital. d. None of the above is correct. ____ 38. A U.S. corporation builds an amusement park in France. Its expenditures are U.S. a. foreign portfolio investment that increase U.S. net capital outflow. b. foreign portfolio investment that decrease U.S. net capital outflow. c. foreign direct investment that increase U.S. net capital outflow. d. foreign direct investment that decrease U.S. net capital outflow. ____ 39. Other things the same, if the exchange rate changes from 75 Algerian dinar per dollar to 72 Algerian dinar per dollar, the dollar has a. appreciated and so buys more Algerian goods. b. appreciated and so buys fewer Algerian goods. c. depreciated and so buys more Algerian goods. d. depreciated and so buys fewer Algerian goods. ____ 40. When the yen gets "stronger" relative to the dollar, a. the U.S. trade deficit with Japan will rise. b. the U.S. trade deficit with Japan will fall. c. the U.S. trade deficit with Japan will be unchanged. d. None of the above necessarily happens. ____ 41. If purchasing-power parity holds, a dollar will buy a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity. ____ 42. The price of a basket of goods is $2000 in the U.S. If purchasing power parity holds, and the dollar buys two units of some country’s currency, then how many units of foreign currency does the same basket of goods cost in that country? a. 4000 b. 2000 c. 1000 d. None of the above are correct. ____ 43. Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing power parity hold? a. Both the euro area and Australia. b. Neither the euro area or Australia. c. The euro area but not Australia. d. Australia but not the euro area. ____ 44. You hold currency from a foreign country. If that country has a higher rate of inflation than the United States, then over time the foreign currency will buy a. more goods in that country and buy more dollars. b. more goods in that country but buy fewer dollars. c. fewer goods in that country but buy more dollars. d. fewer goods in that country and buy fewer dollars. ____ 45. According to purchasing power parity, if the Federal Reserve increased the money supply leading to higher U.S. inflation, then a. U.S. prices would rise and the nominal exchange rate would rise. b. U.S. prices would rise and the nominal exchange rate would fall. c. U.S. prices would fall and the nominal exchange rate would rise. d. U.S. prices and the nominal exchange rate would fall. ____ 46. Other things the same, if the expected return on U.S. assets increased (e.g. higher interest rate), the a. supply of dollars in the market for foreign-currency exchange shifts right. b. supply of dollars in the market for foreign-currency exchange shifts left. c. demand for dollars in the market for foreign-currency exchange does not shifts d. demand for dollars in the market for foreign-currency exchange shifts left. ____ 47. In the open-economy macroeconomic model, if for some reason foreign citizens want to purchase more U.S. goods and services at each exchange rate, then a. the demand for dollars in the market for foreign-currency exchange shifts right. b. the demand for dollars in the market for foreign-currency exchange shifts left. c. the supply of dollars in the market for foreign-currency exchange shifts right. d. the supply of dollars in the market for foreign-currency exchange shifts left. ____ 48. Which of the following characteristics relate to "dollarize"? a. When a country that is not the United States uses the U.S. dollar as its currency. b. The market in which people buy one currency while using another currency. c. When a currency is worth less in terms of other currencies. d. An investment in another country that is purely financial and doesn’t involve any management responsibility. ____ 49. What is meant by foreign direct investment? a. The market in which people buy one currency while using another currency. b. An exchange rate policy where the government usually allows the exchange rate to be set by the market, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene. c. When a country lets the value of its currency be determined in the exchange rate market. d. Purchases of firms in another country that involve taking a management responsibility. ____ 50. What term is used to describe when a currency is worth less in terms of other currencies? a. Depreciating b. Soft peg c. Floating exchange rate d. Appreciating ____ 51. What is meant by purchasing power parity (PPP)? a. When a currency is worth more in terms of other currencies. b. When a country lets the value of its currency be determined in the exchange rate market. c. An exchange rate policy where the government usually allows the exchange rate to be set by the market, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene. d. The exchange rate that equalizes the prices of internationally traded goods across countries. ____ 52. If government policy allows a country's currency to be determined in the exchange rate market, then that currency will be subject to a. a hard peg policy. b. purchasing power parity. c. depreciation. d. a floating exchange rate. ____ 53. If 112 Japanese yen purchased $1.00 U.S. in 2008 and 83 Japanese yen purchased $1.00 U.S. in 2009, then a. the dollar depreciated against the yen b. the dollar appreciated against the yen c. the yen depreciated against the dollar d. the yen weakened against the dollar ____ 54. In 2008, $1.00 U.S. bought 8.24 Chinese yuan and in 2010 it bought 6.64 Chinese yuan. How many U.S. dollars could 1 Chinese yuan purchase in 2008 and 2010? a. 2008: .12 U.S. dollars; 2010: .15 U.S. dollars b. 2008: 1.2 U.S. dollars; 2010: 1.5 U.S. dollars c. 2008: .82 U.S. dollars; 2010: .66 U.S. dollars d. 2008: .15 U.S. dollars; 2010: .11 U.S. dollars ____ 55. In 2008, 1 Swiss franc cost .56 British pounds and in 2010 it cost .51 British pounds in 2010. How much would 1 British pound purchase in Swiss francs in 2008 and 2010? a. 2008: 1.79 francs, 2010: 1.96 francs b. 2008: 1.78 francs, 2010: 1.98 francs c. 2008: 1.71 francs, 2010: 2.00 francs d. 2008: 1.73 francs, 2010: 1.97 francs ____ 56. A stronger British pound is beneficial for a. U.S. exchange students studying in Britain with a U.S. scholarship. b. British firms selling goods and services in Canada. c. British investors who have invested money in Australia. d. exchange students with a British scholarship studying in Canada. ____ 57. What term is used to describe the value of what is produced per worker or per hour worked? a. Human capital b. Physical capital c. Productivity d. Production Function ____ 58. What is meant by capital deepening? a. The process of a firm turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers. b. The skills and education of workers. c. The process of an economy as a whole turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers. d. When an economy has a higher average level of physical and/or human capital per person. ____ 59. Which of the following would be expected if the tariff on foreign-produced automobiles were increased? a. The domestic price of automobiles would fall. b. The supply of foreign automobiles to the domestic market would be reduced, causing auto prices to rise. c. The number of unemployed workers in the domestic automobile industry would rise. d. The demand for foreign-produced automobiles would increase, causing the price of automobiles to increase in other nations. ____ 60. The infant industry argument for protectionism suggests that an industry must be protected in the early stages of its development so that: a. firms will be protected from subsidized foreign competition. b. domestic producers can attain the economies of scale to allow them to compete in world markets. c. there will be adequate supplies of crucial resources in case they are needed for national defence. d. it will not be subjected to a takeover from a foreign competitor. ____ 61. A tariff differs from a quota in that a tariff is a. a tax imposed on imports, whereas a quota is an absolute limit to the number of units of a good that can be imported. b. a tax levied on exports, whereas a quota is a limit on the number of units of a good that can be exported. c. levied on exports, whereas a quota is imposed on imports. d. levied on imports, whereas a quota is imposed on exports. ____ 62. The race to the bottom scenario of global environmental degradation is explained roughly like this: a. Companies seek to reduce their costs of operations on plant and equipment design and this results in higher levels of pollution. b. Companies seek the lowest market prices on products in order to gain market share, resulting in inferior goods and increased waste and pollution. c. Profit-seeking multinational companies shift their production from countries with strong environmental standards to countries with weak standards, thus reducing their costs and increasing their profits. d. Companies seek to influence environmental legislation standards are set to the lowest possible standards in the USA in order to maximize profits. ____ 63. It is sometimes argued that nation should not depend too heavily on other countries for supplies of certain key products. This argument is commonly know as the _______________. a. National Interest Argument b. Import Limitation Argument c. Anti-Dumping Argument d. Buy-American Argument ____ 64. Intra-industry trade between similar trading partners allows the gains from ______________________ that arise when firms and workers specialize in the production of a certain product. a. comparative advantage b. learning and innovation c. creating the value chain d. relative advantage ____ 65. Assume that one day's labor (one unit of labor = one day of labor) in Argentina can produce either 20 units of cloth or 2 units of wine, while in Chile one day's labor can produce either 24 units of cloth or 12 units of wine. If Argentina transfers 2 units of labor from wine to cloth and Chile transfers 1 unit of labor from cloth to wine, the increase in combined output by those two workers will be: a. 16 wine; 8 cloths b. 16 wine; 16 cloths c. 12 wine; 12 cloths d. 8 wine; 16 cloths Short Answer (5 points each) 66. International financial investors are moving funds from Talona to other countries. This depreciation is causing even more disenchantment with this Talona's currency. Describe the affects will this have on the supply and demand curves for this currency on the foreign exchange markets? 67. Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency? 68. Briefly discuss the shortcomings of environmental command-and-control regulations. 69. Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from . However, during these same years South Korea had a 6 percent growth rate of average annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates so different? 70. “Block Imports—Save Jobs for Some Americans, Lose a Roughly Equal Number of Jobs for Other Americans, and Also Pay High Prices.” Discuss this statement within the context of protectionism. 71. Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples. Assume Craig and Steve both operate on straight-line production possibilities curves. What is Steve's opportunity cost of producing a basket of pineapples? Of a producing a fish? What is Craig's opportunity cost of producing a basket of pineapples? Of a producing a fish? 72. Provide examples of market-oriented environmental policies.