If all prices in one country (country A) are higher than all prices in another country (B) when compared at the wage rates that happen to prevail in the two countries, and if the countries share the same currency, then if the nominal wage rate in country B remains fixed a. The nominal wage rate in country A will have to fall. b. Unemployment must be higher in country B than in country A. c. The real wage in country A must be higher than in country B. d. Workers in country A must be less productive than workers in country B. e. Trade cannot be beneficial for country A.

4. According to the theory of comparative advantage, a country will export a good only if a. It can produce it using less labor than other countries. b. Its productivity is higher in producing the good than the productivity of other countries in producing it. c. Its wage rate in producing the good is lower than in other countries. d. Its cost of producing the good, relative to other goods, is at least as low as in other countries. e. All of the above. Suppose that Austria and Belgium have the unit labor requirements for producing steel and brooms shown in the table at the right. Then a. Belgium has a comparative advantage in brooms. b. Austria has a comparative advantage in steel. c. Austria has an absolute advantage in steel. d. Belgium has an absolute advantage in brooms. e. All of the above.

6. Suppose that Australia and Brazil have the outputs per worker in producing sleds and clarinets shown in the table at the right. Then Brazil has a a. Comparative advantage in sleds. b. Comparative advantage in clarinets. c. Absolute advantage in sleds. d. Absolute advantage in clarinets. e. None of the above.

7. According to the theory of comparative advantage, countries gain from trade because a. Trade makes firms behave more competitively, reducing their market power. b. All firms can take advantage of cheap labor. c. Output per worker in each firm increases. d. World output can rise when each country specializes in what its does relatively best. e. Every country has an absolute advantage in producing something. 8. If international trade takes place as a result of comparative advantage, it will cause which of the following effects in the participating countries? a. Inequality among households will be reduced. b. All individuals in each country will be better off. c. The average well-being of people in both countries will increase. d. Both countries will grow faster over time. e. All of the above. Ans: c 9. Scholars at MIT recently tested the theory of comparative advantage. One problem with doing this is that a. The theory was never meant to apply after the 19th century. b. One cannot observe productivity in industries that are not producing. c. Countries keep their data on international trade secret. d. The theory is only valid if the world really only produces two goods. e. The theory turned out to be incorrect. 10. Bernhofen and Brown tested the theory of comparative advantage by looking at data from 19th century Japan. This allowed them to observe which of the following data that would not normally be available? a. Worker productivity across sectors. b. Wages of labor. c. Exports minus imports. d. Consumer preferences for foreign and domestic goods. e. Autarky prices.

11. Clyde Prestowitz, in his assigned reading, cites a study that measures various costs of US trade with China. Which of the following is not one of those costs? a. Unemployment compensation paid by government b. The income lost by workers who become unemployed c. Food stamps d. Lost tax receipts e. School budgets (It is because the study does not include these that Prestowitz argues that the cost of trade is larger than the study says.) 12. In the Embargo Act mentioned in the Costinot and Rodriguez-Clare reading, the US banned trade with a. Britain and France b. Mexico and Canada c. Russia and China d. Germany and Austria e. Japan and Korea

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of a(n)cost a. opportunity b. implicit c. sunk d. transaction 11. The government provides public goods because a. private markets are incapable of producing these types of goods b. free-riders make it difficult for private markets to supply the socially optimal quantity c. markets are always better off with some government oversight d. external benefits will accrue to private producers 12. To gauge the sacrifice made by a taxpayer, we should use the tax rate. a. marginal b. average c. sales d. lump-sum 13. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that a. consumers do not react to changing prices b. there are diseconomies of scale in retail sales c. there are economies of scale in retail sales d. there are diminishing returns to producing and selling retail goods 14. For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the a. average total cost curve b. average variable cost curve c. buyers marginal cost curve d. marginal revenue curve

15. For a monopoly firm, which of the following equalities is always true? a. Price = average revenue b. Price = marginal revenue c. Price = total revenue d. Marginal revenue = marginal cost 16. When a firm operates with excess capacity a. it must be a perfectly competitive firm b. it must be a monopolistically competitive firm c. additional production would increase the average total cost additional production would lower the average total cost 17. Oligopolies can end up looking like competitive markets if the number of firms is a. small and they all cooperate b. small and they do not cooperate c. large and they all cooperate d. large and they do not cooperate 18. Which of the following would shift a market labor supply curve to the left? a. Labor-augmenting technology b. A change in worker tastes so that workers want to retire later c. A decrease in the supply of factors such as capital d. An increase in the wage paid to workers in a competing market 19. The belief that education makes a person more productive and thereby raises his or her wage is referred to as the ________ view of education. a. compensating-differential b. human-capital c. natural-ability d. unmeasured-variables

4. The table on the left below shows labor endowments of two countries, Stonia and Venia, and their unit labor requirements for producing two goods, stuff and nonsense. The table on the right shows the quantities of these two goods that each produces in autarky, and below that has cells to record what they might consume with free trade. Stonia Stonia Venia Labor 300 600 Autarky consumption Unit labor requirements Stuff 90 40 Stuff 2 4 Nonsense 120 88 Nonsense 1 5 Free trade consumption Stuff 100 50 Nonsense 200 100 a. Fill in these empty cells, assuming that each country specializes completely in (that is, uses all of its labor to produce only) the good in which it has a comparative advantage. Assume that with trade Stonia is consumes exactly 2/3 of the two countries' combined output of each good.

b. How much does each country export and import of each good in the free trade situation? Is there evidence here that the countries have gained from trade? answer all