International Trade and Labor Economics Quiz

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Questions and Answers

What is implied about the relationship between low-skilled and high-skilled labor in the production function?

They function independently without interaction.

They are complementary to each other. (correct)

Their productivity decreases in tandem.

They are substitutes for each other.

Which of the following factors do countries differ in that encourages trade?

Currency values

Technology (correct)

Cultural beliefs

Political systems

What is one main benefit of specialization in trade?

Increased product prices globally.

Decreased competition among countries.

Reduction in the variety of goods available.

Achievement of economies of scale. (correct)

What happens to the production function when there is an influx of low-skilled immigration, assuming labor types are complementary?

Overall production may increase. (B) Signup and view all the answers

Which of the following is NOT a reason mentioned for why countries engage in trade?

Cultural exchanges. (D) Signup and view all the answers

Which country has a comparative advantage in producing wine?

Portugal (B) Signup and view all the answers

What is the absolute advantage of the attorney over the secretary?

$175 per hour for legal services (C) Signup and view all the answers

How should the attorney and secretary allocate their one hour of time to maximize output?

Attorney does legal work, secretary does secretarial work (A) Signup and view all the answers

What role does technology play in the Ricardian Trade Model?

It enhances the comparative advantage of countries (C) Signup and view all the answers

What does the term 'constant returns to scale' imply in the context of production?

Output increases proportionately with input (A) Signup and view all the answers

What determines a country's unit labor requirement?

The labor used to produce one unit of a good (C) Signup and view all the answers

In a closed economy, what does the production possibility frontier (PPF) represent?

All possible production options using total labor and given productivities (A) Signup and view all the answers

What assumption is made about firms in a closed economy scenario?

Firms take prices as given due to perfect competition (D) Signup and view all the answers

What is the implication of constant returns to scale in relation to firms' profits?

Firms will incur zero profits (D) Signup and view all the answers

What can be derived from the equation $acQc + awQw = L$ in a closed economy?

The relationship between labor and output quantities (C) Signup and view all the answers

What is the opportunity cost of producing one apple in terms of bananas?

1.5 bananas (C) Signup and view all the answers

What is the unit labor requirement for producing one banana in Foreign?

8 units (C) Signup and view all the answers

Which factor is NOT mentioned as contributing to the distortion of trade patterns?

Technological differences (A) Signup and view all the answers

What does the model predict regarding the specialization of countries?

At least one country will fully specialize in one good. (B) Signup and view all the answers

How does the presence of downward-sloping world relative demand affect equilibrium prices?

Equilibrium prices will fluctuate with shifts in demand and supply. (D) Signup and view all the answers

Which factor is primarily responsible for driving differences in opportunity costs?

Technology (B) Signup and view all the answers

What does comparative advantage indicate about a country?

It has lower opportunity costs for producing certain goods relative to another country. (D) Signup and view all the answers

If Portugal produces 100 liters of wine and could alternatively produce 10 units of cloth, what is the opportunity cost of producing wine?

10 units of cloth (C) Signup and view all the answers

What is a potential benefit of specialization in trade?

Achieving economies of scale (C) Signup and view all the answers

If the opportunity cost of producing wine is higher in England than in Portugal, what should England focus on to gain from trade?

Producing cloth (C) Signup and view all the answers

Which of the following best describes gains from trade?

Countries can benefit from specializing in the production of goods with lower opportunity costs. (C) Signup and view all the answers

If a country has a comparative advantage in wine production over cloth, what does it imply?

The country should focus on wine to maximize trade benefits. (C) Signup and view all the answers

What is one reason why countries engage in trade with one another?

To benefit mutually from differences and economies of scale. (A) Signup and view all the answers

What is the Marginal Principle primarily concerned with?

Making decisions based on incremental changes (C) Signup and view all the answers

What does Marginal Cost represent in production?

The cost of producing one additional unit (C) Signup and view all the answers

When should a firm decide to increase production according to the Optimal Decision Making principle?

When marginal benefit exceeds marginal cost (B) Signup and view all the answers

In the provided example, if the market price for pencils is $4.00 and the cost to produce an additional pencil is $0.5q, what should the firm evaluate?

The marginal benefit against the marginal cost (C) Signup and view all the answers

If producing an additional pencil incurs a cost of $1.50 and the revenue from selling it is $4.00, what is the marginal profit?

$2.50 (C) Signup and view all the answers

Which scenario best illustrates the concept of Marginal Benefit?

A consumer evaluating whether to buy one more pencil for school (C) Signup and view all the answers

Which statement is true regarding optimal production levels?

Optimal production occurs when marginal benefit equals marginal cost (C) Signup and view all the answers

What happens if a firm produces beyond the point where marginal cost equals marginal benefit?

The firm incurs losses on additional production (D) Signup and view all the answers

Study Notes

International Politics and Market Economy - Economics Part - Tutorial 1

Tutorial given by Tim Hug, University of St. Gallen, on November 12, 2024
Focuses on core economic principles, marginal analysis, supply and demand, labor markets, and international trade models.

The Marginal Principle

A decision-making process that considers incremental changes.
Key question: What happens if we do a little more (or less)?
Example applications: Producing an extra pencil, hiring a new worker, consuming another glass of water.

Important Concepts

Marginal Cost: Additional cost of producing one more unit of a good or service. (e.g., producing an extra pencil, requires an additional hour of work).
Marginal Benefit: Additional benefit obtained from producing or consuming one more unit of a good or service. (e.g., selling an extra pencil yields $20 in revenue).
Optimal Decision Making: Continue producing until marginal benefit equals marginal cost – profits/utility are maximised.

Sunk Cost Fallacy

The tendency to continue an endeavor even when additional costs outweigh expected benefits.
Example: Continuing to watch a movie that's disappointing because you've already invested time in it.
Rational choice: Stop if the expected enjoyment from continuing is less than the expected enjoyment from switching to a more interesting movie.

Supply and Demand

Law of Demand: Quantity demanded decreases as price increases.
Law of Supply: Quantity supplied increases as price increases.
The interaction of supply and demand determines market equilibrium.

Neoclassical Labor Market Theory

Perfectly Competitive Market: Assumed for simplicity
Firms aim to maximize profits (max p • F(L,) - w • L).
Households aim to maximize utility, considering consumption and labor supply (max U(C, L) s.t. p • C = w • L).
Labor demand = marginal product of labor(MPL) = marginal cost (MC).
Labor supply increases with income, but comes at a cost in terms of utility loss.

Equilibrium

Excess demand drives wages up.
Excess supply drives wages down.
In equilibrium, labor market clears (no involuntary unemployment).

Labor & Capital

Production function: F(L,K)
Upward-sloping and concave
MPL is increasing in K (implied by FLK >0)
What happens to labor demand when K increases?

High-Skilled & Low-Skilled Labor

Production function: F(L1,Ln)
Profit function: Π = F(L1,L1) – W1L1 – WhLn
Model assumptions: low and high skilled labor are complementary
How does immigration affect equilibrium? (e.g., low-skilled immigration)

Introduction to International Trade

Countries trade due to differences (e.g., technology, geography, endowment) and economies of scale. Countries can benefit from specialization.

Differences in Technology

Opportunity costs: Cost of producing one good in terms of another good.
Differences in technology drive differences in opportunity costs

Comparative Advantage

Definition: A country has a comparative advantage in a good if it can produce that good at a lower opportunity cost relative to another country.
Example: Portugal has a comparative advantage in wine; England in cloth.
Trade allows countries to benefit from specializing in goods where they have lower opportunity costs.

Gains from Trade

Countries can gain from trade by specializing in goods where they have a comparative advantage.
Trade enlarges the consumption possibilities.

Exercises

Comparative Advantage (Allocation of tasks)
Ricardian Model (Production Possibility Frontier)

Wrap Up

Trade patterns are explained by comparative advantage based on technological differences.
Models do not always perfectly reflect the complexities of real-world situations. Elements such as labor mobility differences, trade frictions, political intervention are important considerations.

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Description

This quiz explores key concepts in international trade and labor economics, focusing on the relationships between low-skilled and high-skilled labor, advantages of specialization, and the impact of immigration on production functions. Test your understanding of trade models and the factors that encourage trade between countries.