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Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
1. Trade creates value because:
a. people get what they want.
b. raw materials are transformed into finished products.
c. people exchange things they do not want for things they do.
d. idle resources are put to use.
ANSWER: c
2. eBay creates value by:
a. helping sellers trick buyers into purchasing broken items.
b. moving goods like broken laser pointers from people who don't want them to people who do.
c. helping people with the same preferences find each other.
d. moving toys from children who want them to children who don't.
ANSWER: b
3. David sells his car, which he considers worthless, to Cameron for $200. Which of the following statements is
TRUE?
a. David and Cameron must have different preferences for the car.
b. This trade did not create value because Cameron is buying a car that David considers worthless.
c. Cameron is the only one made better off by the trade.
d. David is made better off by the trade, but Cameron is made worse off.
ANSWER: a
4. Mark values his drum set at $800, and Ella values her guitar at $1,000. Suppose that Mark trades his drum set
for Ella's guitar.
a. This trade makes Ella worse off by $200.
b. This trade makes Mark better off by $200.
c. Mark must value Ella's guitar for at least $800, and Ella must value Mark's drum set for at least
$1,000.
d. This trade decreases total value by moving the guitar and drum away from people who placed a high
value on them.
ANSWER: c
5. Facilitators of trade (such as Pierre Omidyar, the developer of eBay):
a. may become very rich since they are creating value for many individuals.
b. find it very hard to profit from their services since they are not directly involved in the trades.
c. typically profit from their services only if they are able to obtain government patent rights.
d. are usually seen as taking advantage of consumers.
ANSWER: a
6. Trade makes people better off when:
a. everyone wants the same things as other people.
b. some people are less productive than others.
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,DOWNLOAD THE Test Bank for Modern Principles Microeconomics 4th Editio
Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
c. people cannot specialize in certain activities.
d. people have different preferences.
ANSWER: d
7. Each of 100 people receives a random item from a grocery store and assigns it a value between 1 (low) and
10 (high). They trade those items among themselves for items they prefer rather than those they randomly
received and then assign a second value (again, 1 to 10) to the item that they end up with after the trading
concludes. How would the sum of those values before trading compare with the sum after trading?
a. The value would stay the same because no new goods were introduced.
b. The value would stay the same because no one has a comparative advantage.
c. After trading, value would be lower because no one can specialize.
d. After trading, value would be higher because preferences are diverse.
ANSWER: d
8. Which of the following is least likely a consequence of the division of knowledge?
a. the development of the computer tablet
b. a totally self-sufficient family farm
c. a new delivery method for cancer-fighting drugs
d. the provision of a new bike path in your community
ANSWER: b
9. Only a very small portion of people who use microwaves know how they work. This is an example of:
a. a production possibility frontier.
b. division of knowledge.
c. absolute advantage.
d. opportunity cost.
ANSWER: b
10. Division of knowledge refers to:
a. dividing tasks into different subtasks and having one person perform all these subtasks.
b. people learning different tasks in which they specialize.
c. assigning one person to learn all the different ways to perform the same task.
d. limiting what each person knows about another person.
ANSWER: b
11. Which of the following situations would lead to more starvation?
a. a world where everyone grows his or her own food and there is no trade
b. a world with trade and lots of specialization
c. a world with immense division of knowledge
d. a world where only some people specialize in food and everyone else produces something else
ANSWER: a
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,DOWNLOAD THE Test Bank for Modern Principles Microeconomics 4th Editio
Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
12. The main reason specialization can raise productivity is that:
a. knowledge in human brains is limited.
b. some persons have more knowledge than others.
c. it is always good to know less than more.
d. it is impossible to learn anything well.
ANSWER: a
13. Knowledge increases ____________ and specialization __________ total output.
a. education; decreases
b. productivity; increases
c. perception; increases
d. economies of scale; decreases
ANSWER: b
14. Economic growth in the modern era is primarily due to the:
a. increases in the number of people.
b. increases in money.
c. defining of nation borders.
d. creation of new knowledge.
ANSWER: d
15. Specialization and trade can _____ the per unit cost of production because _____ .
a. decrease; it allows for more small-scale production
b. decrease; it creates economies of scale associated with large-scale production
c. increase; it requires more expensive, specialized equipment
d. increase; more expensive labor is needed
ANSWER: b
16. The United States and the European Union are groups of semi-independent states that have come together
under an agreement whereby resources can travel freely across borders and a common currency is in use. Which
of the following statements best explains how this allows for the achievement of economies of scale?
a. Each state or country can now target larger markets and can thus earn more export revenue.
b. States and countries no longer have to worry about borders impeding trade.
c. Each state or country can adopt large-scale production techniques that allow lower per unit costs of
production.
d. The removal of trade borders and a common currency enhances trade between member states.
ANSWER: c
17. One of the outcomes of specialization is that it leads to _____, which _____ the average cost of production.
a. smaller-scale production; lowers
b. smaller-scale production; raises
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Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
c. larger-scale production; raises
d. larger-scale production; lowers
ANSWER: d
18. If each of us had to grow all of our own food:
a. civilization would collapse and billions of people would starve.
b. we would have more time for other pursuits.
c. people would be richer, since they would no longer have to spend money on groceries.
d. the total amount of knowledge in society would increase, since everyone would have to learn about
farming.
ANSWER: a
19. If instead of specialized doctors (neurologists, cardiologists, gastroenterologists, etc.) we had doctors who
each knew the same things about all aspects of medicine, it would be:
a. better because then we could just go to one doctor with no loss of quality in medical care.
b. better because total medical knowledge in society would increase.
c. worse because the human brain is limited.
d. worse because total medical knowledge in society would decrease.
ANSWER: d
20. Roses grown in Kenya travel to Amsterdam and ultimately to your local flower shop because:
a. the World Rose Commission coordinates the different elements of the rose industry.
b. markets coordinate the specialization and trade necessary for the flower industry to function.
c. of the trade agreement between the governments of Kenya and Amsterdam.
d. customers are willing to pay more for roses that pass through Amsterdam.
ANSWER: b
21. Trade barriers like the Berlin Wall:
a. increased the number of scientists and engineers.
b. added billions of minds to the global division of knowledge.
c. decreased innovation and global cooperation.
d. prevented restrictive monopolistic practices.
ANSWER: c
22. A rock carving from ancient Norway depicts two identical people doing different jobs in the same boat: one
uses a bow to hunt while the other paddles. How does this early example illustrate the benefits of trade?
a. One prefers to hunt, while the other prefers to paddle the boat; this is an example of diverse
preferences.
b. One learns to be very good at paddling, and one learns to be very good at hunting; this is an example
of specialization and division of knowledge.
c. The paddler is stronger than the hunter, so the paddler sacrifices a lot by hunting; this is an example
of comparative advantage.
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Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
1. Trade creates value because:
a. people get what they want.
b. raw materials are transformed into finished products.
c. people exchange things they do not want for things they do.
d. idle resources are put to use.
ANSWER: c
2. eBay creates value by:
a. helping sellers trick buyers into purchasing broken items.
b. moving goods like broken laser pointers from people who don't want them to people who do.
c. helping people with the same preferences find each other.
d. moving toys from children who want them to children who don't.
ANSWER: b
3. David sells his car, which he considers worthless, to Cameron for $200. Which of the following statements is
TRUE?
a. David and Cameron must have different preferences for the car.
b. This trade did not create value because Cameron is buying a car that David considers worthless.
c. Cameron is the only one made better off by the trade.
d. David is made better off by the trade, but Cameron is made worse off.
ANSWER: a
4. Mark values his drum set at $800, and Ella values her guitar at $1,000. Suppose that Mark trades his drum set
for Ella's guitar.
a. This trade makes Ella worse off by $200.
b. This trade makes Mark better off by $200.
c. Mark must value Ella's guitar for at least $800, and Ella must value Mark's drum set for at least
$1,000.
d. This trade decreases total value by moving the guitar and drum away from people who placed a high
value on them.
ANSWER: c
5. Facilitators of trade (such as Pierre Omidyar, the developer of eBay):
a. may become very rich since they are creating value for many individuals.
b. find it very hard to profit from their services since they are not directly involved in the trades.
c. typically profit from their services only if they are able to obtain government patent rights.
d. are usually seen as taking advantage of consumers.
ANSWER: a
6. Trade makes people better off when:
a. everyone wants the same things as other people.
b. some people are less productive than others.
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Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
c. people cannot specialize in certain activities.
d. people have different preferences.
ANSWER: d
7. Each of 100 people receives a random item from a grocery store and assigns it a value between 1 (low) and
10 (high). They trade those items among themselves for items they prefer rather than those they randomly
received and then assign a second value (again, 1 to 10) to the item that they end up with after the trading
concludes. How would the sum of those values before trading compare with the sum after trading?
a. The value would stay the same because no new goods were introduced.
b. The value would stay the same because no one has a comparative advantage.
c. After trading, value would be lower because no one can specialize.
d. After trading, value would be higher because preferences are diverse.
ANSWER: d
8. Which of the following is least likely a consequence of the division of knowledge?
a. the development of the computer tablet
b. a totally self-sufficient family farm
c. a new delivery method for cancer-fighting drugs
d. the provision of a new bike path in your community
ANSWER: b
9. Only a very small portion of people who use microwaves know how they work. This is an example of:
a. a production possibility frontier.
b. division of knowledge.
c. absolute advantage.
d. opportunity cost.
ANSWER: b
10. Division of knowledge refers to:
a. dividing tasks into different subtasks and having one person perform all these subtasks.
b. people learning different tasks in which they specialize.
c. assigning one person to learn all the different ways to perform the same task.
d. limiting what each person knows about another person.
ANSWER: b
11. Which of the following situations would lead to more starvation?
a. a world where everyone grows his or her own food and there is no trade
b. a world with trade and lots of specialization
c. a world with immense division of knowledge
d. a world where only some people specialize in food and everyone else produces something else
ANSWER: a
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,DOWNLOAD THE Test Bank for Modern Principles Microeconomics 4th Editio
Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
12. The main reason specialization can raise productivity is that:
a. knowledge in human brains is limited.
b. some persons have more knowledge than others.
c. it is always good to know less than more.
d. it is impossible to learn anything well.
ANSWER: a
13. Knowledge increases ____________ and specialization __________ total output.
a. education; decreases
b. productivity; increases
c. perception; increases
d. economies of scale; decreases
ANSWER: b
14. Economic growth in the modern era is primarily due to the:
a. increases in the number of people.
b. increases in money.
c. defining of nation borders.
d. creation of new knowledge.
ANSWER: d
15. Specialization and trade can _____ the per unit cost of production because _____ .
a. decrease; it allows for more small-scale production
b. decrease; it creates economies of scale associated with large-scale production
c. increase; it requires more expensive, specialized equipment
d. increase; more expensive labor is needed
ANSWER: b
16. The United States and the European Union are groups of semi-independent states that have come together
under an agreement whereby resources can travel freely across borders and a common currency is in use. Which
of the following statements best explains how this allows for the achievement of economies of scale?
a. Each state or country can now target larger markets and can thus earn more export revenue.
b. States and countries no longer have to worry about borders impeding trade.
c. Each state or country can adopt large-scale production techniques that allow lower per unit costs of
production.
d. The removal of trade borders and a common currency enhances trade between member states.
ANSWER: c
17. One of the outcomes of specialization is that it leads to _____, which _____ the average cost of production.
a. smaller-scale production; lowers
b. smaller-scale production; raises
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Cowen
Name: Class: Date:
Chapter 2 - The Power of Trade and Comparative Advantage
c. larger-scale production; raises
d. larger-scale production; lowers
ANSWER: d
18. If each of us had to grow all of our own food:
a. civilization would collapse and billions of people would starve.
b. we would have more time for other pursuits.
c. people would be richer, since they would no longer have to spend money on groceries.
d. the total amount of knowledge in society would increase, since everyone would have to learn about
farming.
ANSWER: a
19. If instead of specialized doctors (neurologists, cardiologists, gastroenterologists, etc.) we had doctors who
each knew the same things about all aspects of medicine, it would be:
a. better because then we could just go to one doctor with no loss of quality in medical care.
b. better because total medical knowledge in society would increase.
c. worse because the human brain is limited.
d. worse because total medical knowledge in society would decrease.
ANSWER: d
20. Roses grown in Kenya travel to Amsterdam and ultimately to your local flower shop because:
a. the World Rose Commission coordinates the different elements of the rose industry.
b. markets coordinate the specialization and trade necessary for the flower industry to function.
c. of the trade agreement between the governments of Kenya and Amsterdam.
d. customers are willing to pay more for roses that pass through Amsterdam.
ANSWER: b
21. Trade barriers like the Berlin Wall:
a. increased the number of scientists and engineers.
b. added billions of minds to the global division of knowledge.
c. decreased innovation and global cooperation.
d. prevented restrictive monopolistic practices.
ANSWER: c
22. A rock carving from ancient Norway depicts two identical people doing different jobs in the same boat: one
uses a bow to hunt while the other paddles. How does this early example illustrate the benefits of trade?
a. One prefers to hunt, while the other prefers to paddle the boat; this is an example of diverse
preferences.
b. One learns to be very good at paddling, and one learns to be very good at hunting; this is an example
of specialization and division of knowledge.
c. The paddler is stronger than the hunter, so the paddler sacrifices a lot by hunting; this is an example
of comparative advantage.
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