Economics Production Possibilities Quiz

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Questions and Answers

What does the equation aLCQC + aLWQW ≤ L represent?

Total amount of labour resources in the economy (correct)

Total production cost of cheese and wine

Total consumption of cheese and wine

Total revenue generated from cheese and wine

What happens if the price of cheese per unit labour cost is higher than that of wine?

Workers will only make cheese (correct)

Workers will evenly distribute between cheese and wine production

Production levels of cheese will decrease

Workers will only make wine

What does the slope of the production possibilities frontier indicate?

The total units of labour allocated

The total amount of wine produced

The efficiency of resource allocation

The opportunity cost of producing cheese in terms of wine (correct)

In the context of production wages, what is the correct equation for the price of cheese?

$P_C = w_C a_LC$ Signup and view all the answers

If the production possibilities frontier is represented by the equation aLCQC + aLWQW = L, what does this signify?

Total labour resources are being fully utilized Signup and view all the answers

Which of the following relationships would require workers to switch from cheese to wine production?

$P_C / a_LC < P_W / a_LW$ Signup and view all the answers

What does the variable QW represent in the production possibilities equation?

The total amount of wine produced Signup and view all the answers

Which factor primarily influences the choice of industry for workers in a competitive market?

The wage differences between sectors Signup and view all the answers

Which country exhibits a stronger comparative advantage in textiles and apparel?

China Signup and view all the answers

What was the productivity ratio of Chinese output per worker to that of Germany in 1995?

5% Signup and view all the answers

How much more productive is the U.S. compared to China in textiles?

Which of the following industries reported a significant reduction in production capacity in 1999 due to increased imports from Asia?

Apparel Signup and view all the answers

What is the sales per employee for U.S. apparel producers?

$92,000 Signup and view all the answers

What is the productivity of the U.S. in wheat compared to China?

275 times more productive Signup and view all the answers

What is the annual sales per employee in the textile industry in China?

$9,000 Signup and view all the answers

Relative wages in the Ricardian model are expected to reflect what aspect?

Relative productivities Signup and view all the answers

What happens to the caviar industry when the relative wage increases from 3.99 to 4.01?

The caviar industry relocates to the Foreign country. Signup and view all the answers

Which of the following is a reason why complete specialization rarely occurs according to the Ricardian model?

Transportation costs may reduce or prevent trade. Signup and view all the answers

Why might some goods become non-tradable according to the content?

Increased transportation costs. Signup and view all the answers

What does empirical evidence suggest about technology and trade patterns?

Countries export goods in which they have a comparative advantage. Signup and view all the answers

What effect does an increase in relative wage have on the demand for labor in the Home country?

Demand for specific goods may decrease. Signup and view all the answers

What can prevent a country from achieving complete specialization in the Ricardian model?

Multiple factors of production. Signup and view all the answers

How does a rise in transportation costs impact trade?

It can minimize the likelihood of trade and reduce non-tradability. Signup and view all the answers

What happens when the relative price of cheese falls below $a_{LC}/a_{LW}$?

Home will specialize in wine production. Signup and view all the answers

At what point are Home workers indifferent between producing wine or cheese?

When $P_C/P_W = a_{LC}/a_{LW}$ Signup and view all the answers

What is the relationship between pre-trade relative prices and equilibrium relative prices in world markets?

They necessarily fall within the pre-trade price interval. Signup and view all the answers

What will occur when $P_C/P_W$ is greater than $a_{LC}/a_{LW}$ but less than $a_{LC}/a_{LW}$?

Home will specialize in cheese production. Signup and view all the answers

How is relative supply of cheese calculated?

$(Q_C + Q^{}_C)/(Q_W + Q^{}_W)$ Signup and view all the answers

What will occur when $P_C/P_W = a_{LC}/a_{LW}$?

Home workers will be indifferent to production. Signup and view all the answers

Relative demand of cheese is defined as what?

The quantity of cheese demanded relative to the quantity of wine demanded at each price. Signup and view all the answers

When does Foreign workers produce only wine?

When $P_C/P_W < a_{LC}/a_{LW}$ Signup and view all the answers

What is the primary benefit of trade between countries?

Expansion of consumption due to specialization according to comparative advantage Signup and view all the answers

In the context of comparative advantage, which country has the comparative advantage in cheese production?

Home country Signup and view all the answers

What must the equilibrium relative price of cheese be with trade between Home and Foreign countries?

Between 1/2 and 2 Signup and view all the answers

How much cheese can the Foreign country produce with one hour of labor without trade?

1/6 pound Signup and view all the answers

If the Home country trades one pound of cheese, how much wine will it obtain?

1 gallon Signup and view all the answers

What is the unit labor requirement for wine production in the Foreign country?

3 hours/gallon Signup and view all the answers

Why is it said that the Home country has a comparative advantage in cheese?

It has lower labor requirements relative to foreign cheese production. Signup and view all the answers

What does the trade scenario suggest about the production capabilities of the Home country compared to the Foreign country?

Home has an efficiency advantage only in cheese production. Signup and view all the answers

How many hours of labor are required to produce 1 pound of cheese using the direct method of production?

6 hours Signup and view all the answers

What is one potential benefit for a technologically backward country engaging in free trade?

It avoids high costs for domestically produced goods. Signup and view all the answers

What does the theory of unequal exchange suggest about lower wages in trade?

They exploit countries, making them worse off. Signup and view all the answers

Which statement about comparative advantage is accurate?

Lower wages can offset disadvantages due to low productivity. Signup and view all the answers

What misconception exists regarding free competition and low wages?

It can be unfair to other countries. Signup and view all the answers

Which of the following is a benefit of free trade for consumers?

Access to efficiently produced goods. Signup and view all the answers

How much wine can be produced with one hour of labor in a foreign country?

1/3 gallon Signup and view all the answers

What misconception suggests that trade arises only from strong countries?

Weaker countries do not benefit from trade. Signup and view all the answers

Study Notes

Introduction to Labour Productivity and Comparative Advantage: The Ricardian Model

Countries trade due to their differences and to achieve economies of scale in production.
Comparative advantage exists when a country has a lower opportunity cost of producing a good than other countries.
Absolute advantage exists when a country produces a good or service more efficiently than other countries.

Concepts

Market size and distance between countries influence trade volume (gravity model).
Theories on trade differ on how they explain specialization patterns.
Trade is beneficial for all countries (gains from trade).
Differences in labour, capital, resources and technology create comparative advantages.
The Ricardian model explains that differences in labour productivity (productivity of labour) cause comparative advantages.
The Heckscher-Ohlin model suggests that differences in factor endowments (labour, skills, capital, land) create comparative advantages.
Even similar countries can have comparative advantages due to historical factors and economies of scale.

Assumptions of the Ricardian Model

Only two countries, Home and Foreign, and two goods, wine and cheese.
Labour is the only production factor.
Labour supply is constant over time.
Labour productivity varies between countries.
Labour productivity is constant over time (doesn't change with production volume).
Workers can freely move between sectors.
Consumer preferences are equal across countries.
There are no transportation costs or trade barriers.

Production Possibilities

The production possibility frontier (PPF) shows the maximum amount of goods that can be produced with available resources and technology.
The PPF equation is ALCQC + ALWQw ≤ L.

Production, Prices and Wages

The price of a good equals its unit labour cost (e.g., Pc = wc aLc).
Hourly wages equal the market value of output produced in an hour (e.g., wc = Pc/aLc).
Workers move to sectors with higher wages.
Countries specialize in production based on a comparison of relative wage and productivity.

Trade in the Ricardian Model

Home being more efficient than Foreign in both wine and cheese production means Home has an absolute advantage.
Comparative advantage is determined by which good/ service has the lower relative opportunity cost than its counterpart(e.g. aLC/aLw < aLC/aLW).

Relative Prices with Trade

Without trade, the relative price of a good is equal to its opportunity cost.
Relative prices with trade may adjust to a level between the pre-trade relative prices.
Trade leads to a reduction in the price of the less productive good.
The relative price of a good falls when the wage rises.

Gains from Trade

Trade allows countries to specialize in producing goods/ services where they have a comparative advantage.
This leads to increased production/ consumption possibilities.
Trade increases the income of workers and lowers consumer prices.
The "trade technology" converts goods efficiently into other goods based on comparative advantages.

Empirical Evidence

The Ricardian model often doesn't predict complete specialization (e.g., due to factors like multiple production factors and transportation costs).
There are examples where countries have comparative advantages due to factors such as low wages, and high productivity.
Productivity often, but not always follows the trend of wages across countries.

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Description

This quiz explores the concepts related to production possibilities, including equations, comparative advantage, and industry choices. Test your understanding of the production possibilities frontier and how various factors influence economic decisions in production. Perfect for students studying economics at an advanced level.