E1)Two countries, A and B, are trading apples and bananas. Neither country has any capital; labor is the only factor of production. Suppose that country A has a comparative advantage in apples and country B has a comparative advantage in bananas. Then, country A passes a bill to increase all domestic wages proportionately. As a result, the cost of producing apples in country A exceeds the cost of producing them in country B.

What happens after the wage bill passes?

a)Country B will export apples to country A.

b)Country B will continue to import apples from country A.

c)The countries will stop trading with each other.

d)None of the above answers are necessarily true.

E2)Which statements about insurance are true? (more than one answer can be correct)

a)Insurance protects against the the worst-case scenario. All rational people want to buy insurance.

b)Insurance costs money, and therefore always decreases expected utility. Only irrational people want to buy insurance.

c)The decision to buy insurance does not depend on the insurance premium. The premium is a set cost without any random element.

d)No risk-lovers want to buy fair insurance.

e)None of the above

E3)Consider the production of wine and cheese in France and Spain. The table below gives the number of necessary hours to produce each (labor is the only input).

France Spain

1 kg cheese 5 6

1 bottle wine 11 12

Is it in Spain's interest to develop trade relationships with France?

a)It is not in Spain's interest to develop trade relationships with France

b)It is in Spain's interest to develop trade relationships with France

E4)Is it in France's interest to trade with Spain?

a)It is in France's interest to develop trade relationships with Spain

b)It is not in France's interest to develop trade relationships with Spain

E5)Is France more competitive at producing both goods?

a)France is more competitive at one good

b)France is more competitive at producing both goods

c)France is more competitive at neither good

E6)Suppose that after countries specialize in producing one product, they have diseconomies of scope, so that the hours necessary to produce the goods become

France Spain

1 kg cheese 2 6

1 bottle wine 11 8

After specialization, what happens to the gains from trade?

a)Gains from trade increase

b)Gains from trade remain unchanged at zero

c)Gains from trade remain unchanged, but positive

d)Gains from trade decrease

e)Gains from trade increase to infinity