Answers to Study Questions for Test #1

Here is the key to the sample problems. Please let me know if you believe any of these to be incorrect.

1-A, 2-B, 3-A, 4-A, 5-C, 6-A,

7-C, 8-D, 9-D, 10-C, 11-C, 12-B,

13-A, 14-D, 15-C, 16-D,

17-C, 18-C, 19-B, 20-B, 21-D, 22-B, 23-D

24-B, 25-C, 26-B, 27-B, 28-A, 29-B,

30-C, 31-C, 32-B, 33-C, 34-C

Short answer:

A. True; two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods. All that's necessary is that each country have a comparative advantage in some good.

B. False; it is not true that some people have a comparative advantage in everything they do. In fact, no one can have a comparative advantage in everything. Comparative advantage reflects the opportunity cost of one good or activity in terms of another. If you have a comparative advantage in one thing, you must have a comparative disadvantage in the other thing.

C. False; it is not true that if a trade is good for one person, it can't be good for the other one. Trades can and do benefit both sides, especially trades based on comparative advantage. If both sides didn't benefit, trades would never occur.