Name:________________

SSII 2010, 160A

Farshid Mojaver

Final

Professor:

There are 45 MC questions worth 46 points. Write the best answer in

your scantron.

A)
B)
C)
D)

1.According to the Ricardian principle of comparative advantage, international trade increases a

nation's total output because:
The nation's resources are used where they are most productive.
The output of the nation's trading partner declines.
The nation can produce to the exterior of its production possibilities frontier.
The nation is able to increase its consumption.

D)

2.Because the marginal product of labor measures the quantity of labor required to produce a unit
of a good, the slope of the PPF can also be expressed as:
the ratio of abundance of labor to capital.
consumer utility.
the opportunity cost (in units of labor) to obtain an additional unit of good 1 in terms of what
we give up of good 2.
the ratio of the marginal products of labor to the marginal product of capital.

A)
B)
C)
D)

3.If the opportunity cost is constant (the PPF is a straight line), then a country will:
partially specialize in the production of the exportable product.
completely specialize in the production of the exportable product.
not benefit from importing goods from another country.
benefit by raising trade barriers.

A)
B)

4.Compared with constant cost production, if production occurs under increasing cost conditions, it
is more likely that countries will:
completely specialize.
C) not engage in international trade.
incompletely specialize.
D) trade with one another.

A)
B)
C)

D)

5.Suppose that there are two countries (Home and Foreign) that produce two goods. Home's wages are
100% greater than Foreign's wages. Will trade be possible between Home and Foreign?
No, because Foreign's wages are lower than Home's wages.
Yes, Foreign will be able to export both products to Home.
Yes, as long as Home's marginal productivity of labor in one product is at least 100% higher
than Foreign's marginal productivity of labor in the same product.
No, because prices will be the same in each country.

A)
B)
C)
D)

6.According to the principle of comparative advantage, specialization and trade increase a nation's
total output because:
Resources are directed to their highest productivity.
The output of the nation's trading partner declines.
The nation can produce outside its production possibilities frontier.
The problem of unemployment is eliminated.

A)
B)
C)

7.Assume that Germany and China can produce beer and cloth. If the MPLc/MPLb for Germany is
2/5 and MPLc/MPLb for China is 1, then Germany and China have a comparative advantage in:
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A)
B)

cloth and beer, respectively.

beer and cloth, respectively.

C) beer.
D) cloth.

A)
B)

8.Suppose that the introduction of computers increases the productivity of workers in the developed
world. What you would expect wages to do?
rise mainly in the developed countries
C) fall mainly in the developed countries
rise mainly in the developing countries
D) fall mainly in the developing countries

A)
B)

9.Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors
model has a comparative advantage in manufacturing output. What will happen to the relative
price of manufactured output when trade occurs?
It will fall.
C) It will not change.
It will rise.
D) It will first rise, then fall.

10.Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-factors
model has a comparative advantage in manufacturing output. What will happen to the return
(rental) on land when trade occurs?
A)
It will fall.
C) It will not change.
B)
It will rise.
D) It will first fall, then rise.
A)
B)
C)
D)

11.One reason that nations impose agricultural quotas and other restrictions is:
to limit imports to protect the incomes of specific factors (farm owners).
to ensure a plentiful food supply.
to keep the food supply safe from harmful additives used in foreign nations.
None of these answer choices are correct.

A)
B)
C)
D)

12.The implication of resources being mobile domestically is:

There is often unemployment.
Capital and land are often not suited for use in other industries.
Labor and capital are paid the same wage and rental price in all domestic industries.
They lose the chance to become guest workers in other nations.

A)
B)
C)
D)

13.The Heckscher-Ohlin Model assumes that:

Factor endowments are same.
Consumer tastes are the same across countries,
The technologies used to produce the two goods are identical across the countries.
Consumer tastes and technologies are the same across countries.

14.The HO model predicts that firms will increase production of the item exported and hire more
resources. Therefore the factor of production used more intensely in the production of exports
will experience:
A)
a decline in demand and a decline in the relative wage (rental price).
B)
a decline in demand and an increase in the relative wage (rental price).
C)
an increase in demand and an increase in the relative wage (rental price).
D)
no change in demand because the factors of production are fixed in the short run.
A)
B)
C)
D)

15.Suppose that all countries eliminate their barriers to trade. The Heckscher-Ohlin model predicts that:
Wages should become more equal throughout the world.
Wages should become more unequal throughout the world.
The volume of international trade should fall.
There should be increased migration of labor among countries.

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16.A retest of the HO prediction and the Leontief paradox for the United States reveals:
that taking into account the differing labor productivities brings more consistent results.
that new procedures to measure the effective factor content of imports and exports confirm
the HO hypothesis.
C)
that Leontief's paradox is solved once we adjust the U.S. labor force in 1947 for its higher
productivity.
D)
All of the answer choices are correct.
A)
B)

17.When a country requires fewer resources to produce a product than other countries, it is said to
have a(n):
A)
absolute advantage in the production of the product.
B)
comparative advantage in the production of the product.
C)
higher opportunity cost of producing the product.
D)
lower opportunity cost of producing the product.
18.Because immigration raises the marginal products and the return to nonlabor factors of
production, in the short run owners of nonlabor resources often support:
A)
open borders.
B)
tighter restrictions on immigration.
C)
controls on the flow of foreign direct investment (FDI).
D)
immigration of persons only for humanitarian reasons.
19.The hypothesis that the results of a long-run Heckscher-Ohlin model with labor immigration will
result in an increase in production for the labor-intensive industry while reducing production in
the capital-intensive industry is known as the _____ theorem.
A)
Stolper-Samuelson
C) Ricardian.
B)
specific-factors
D) Rybczynski
20.In the long run, when FDI occurs, industry output in the recipient nation is affected in the following
way(s):
A)
There is no change in either the output of the capital-intensive or the labor-intensive industry.
B)
The labor-intensive industry expands; the capital-intensive industry contracts.
C)
The capital-intensive industry expands; the labor-intensive industry contracts.
D)
Both capital- and labor-intensive industries expand in the same proportion.
21.Economists conclude that the effect on our world's standard of living as a result of labor and
capital migration has been:
A)
negative overall.
B)
positive overall as resources move to their highest-valued use.
C)
positive in some respects but very harmful in the long run to workers.
D)
so small worldwide that the effect is not worth measuring.

A)
B)

22Products traded between two nations that are very similar and very close substitutes, but that may
be of different quality or prices, are called:
differentiated complements.
C) differentiated products.
differentiated substitutes.
D) perfect substitute products.

A)

23The cross trade of very similar products exported and imported by trading partners seems to
contradict which model(s)?
Ricardian
C) specific-factors

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B)

Heckscher-Ohlin

D) All of the answer choices are correct.

D)

24In monopolistic competition, when trade is opened, if the nations have similar tastes, technology,
products, and costs, the outcome is that:
No trade is possible.
Consumers are left with no choices.
Each firm has a larger market in which to sell, and consumers have more choices of sellers
and products.
Transportation costs become the driving factor.

A)
B)

25The main reason why firms consider outsourcing is to:

decrease their labor costs.
C) decrease their construction costs.
decrease their transportation costs.
D) decrease their trade costs.

A)
B)
C)

C)
D)

26What are the trade costs that firms need to consider when making outsourcing decisions?
higher prices of utilities (electricity, fuel) in other countries
higher costs associated with poor communication and transportation plus costs of import
taxes and other business regulations
higher costs of construction of a plant in other countries
import taxes and other business regulations

A)
B)

27Which of the following groups of Ford Motor Company employees will be most adversely
affected by Ford's outsourcing of part of its operations to Mexico?
Ford engineers and scientists
C) Ford managers
Ford accountants
D) Ford assembly line workers

A)
B)
C)
D)

28How will an increase in outsourcing affect the demand for skilled labor and wages of skilled labor
in the home country?
The demand for skilled labor will increase, but the wages of skilled labor will decrease.
The demand for skilled labor and the wages of skilled labor will both decrease.
The demand for skilled labor will decrease, but the wages of skilled labor will increase.
The demand for skilled labor and the wages of skilled labor will both increase.

A)
B)

A)
B)
C)
D)

A)
B)
C)
D)

29Why is the United States more likely to outsource skilled service activities rather than unskilled
manufacturing activities to India?
Indian trade costs for manufacturing and service activities are uniformly high.
Relative wages of less-skilled workers are lower in India than in the United States.
Indian trade costs associated with service activities are higher than those associated with
manufacturing activities.
Indian trade costs associated with service activities are lower than those associated with
manufacturing activities.
30The escape clause in U.S. trade law:
enables the United States to withdraw from NAFTA.
permits the U.S. government to impose trade barriers if fairly traded imports are the cause of
significant injury to a U.S. industry and its workers.
permits the government to impose trade remedies against nations that unfairly subsidize their
exports to the United States.
enables immigrants to return to their home countries
31Normally the WTO does not allow discriminatory treatment in trade of member nations, but it

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A)
B)
C)
D)

makes an exception for:

nations that have a large trade surplus.
nations using environmentally harmful production techniques.
nations who cannot control drugs and other illegal activities.
nations engaging in regional free-trade agreements.

A)
B)
C)
D)

32When a large country imposes a tariff, the burden is often shared by:
foreign consumers and domestic producers.
domestic consumers and foreign producers.
all producers and consumers in each nation equally.
its government.

A)
B)

33If rent-seeking occurs, then a country's welfare losses from quotas will:
increase.
C) not change.
decrease.
D) first increase, then decrease.

A)
B)

34If a quota license is awarded to a domestic firm without an auction, it may generate bribes or
lobbying spending to earn this revenue. Economists call this a(n) ____ activity.
Efficient
C) wasteful rent-seeking
Unnecessary
D) profit-maximizing

A)
B)

35Who captured the quota-rents of the 1980s U.S.-Japanese voluntary export agreement for
automobiles?
Japanese auto producers
C) U.S. auto producers
U.S. consumers of Japanese automobiles
D) the U.S. government

A)
B)
C)
D)

36An international trade agreement that provides an incentive and reward for nations not to impose
tariffs would have what effect?
an increase in world welfare and standard of living
higher efficiency
opportunity for low-income nations to exploit the gains from trade
an increase in world welfare and standard of living, higher efficiency, and opportunity for
low-income nations to exploit the gains from trade

Use the following to answer questions 37-40 Figure: Home's Exporting Industry
The supplied graph shows the effect of an export subsidy on a large country.

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A)
B)

37According to the figure, if the home country provides an export subsidy of $100, the large
country will cause the world price to:
increase by $50.
C) decrease by $50.
increase by $150.
D) decrease by $150.

A)
B)

38According to the figure, due to the subsidy, the consumer surplus _______ by _______.
increases; $2,500
C) increases; $1,875
decreases; $1,875
D) decreases; $2,500

A)
B)

39According to the figure, due to the subsidy, the revenue cost for the government is:
$1,250.
C) $150.
$12,500.
D) $1,500.

A)
B)

40According to the figure, the deadweight loss due to the export subsidy is:
$12,500.
C) $1,250.
$625.
D) $5,000.

A)
B)
C)
D)

41For a small nation employing a production subsidy, domestic producers get a payment for every
good produced, and domestic consumers:
get to purchase the product at the world price the same as before the subsidy.
have to pay a higher price for the product.
get a reduced price for the product.
purchase more of the product.

A)
B)

42Implementing a regional free-trade agreement may have an effect in which, due to reduced tariffs,
a nation in the agreement begins to import a product it had produced itself. This effect is called:
trade creation.
C) reciprocal trade agreements.
trade diversion.
D) the employment effect of FTAs.

A)
B)

43When products from a high-cost country within a customs union replace imports from a low-cost
country that is not a member of the union, this is called:
trade creation.
C) trade deflection.
trade diversion.
D) trade development.

A)
B)
C)
D)

44A positive externality occurs whenever:

an increase in the output of one firm lowers costs for other firms.
a decrease in the output of one firm lowers costs for other firms.
an increase in costs of one firm lowers costs for other firms.
a decrease in one firm's hiring of labor lowers labor costs for other firms.

A)
B)

45.Internal economies of scale arise when the cost per unit

rises as the industry grows larger.
C) rises as the average firm grows larger.
falls as the industry grows larger.
D) falls as the average firm grows larger.

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[10 pts] Problem 1: Migration

Show that labor migration increases world output and the GDP of the immigrant receiving
country.
Wage
Wage
B

W
C

W*
MPL

MPL*
O

O*

Migration of labor from Foreign to Home

There are two factors of production: Land (T) and Labor (L), two countries and one good. Before
Immigration Home is land-abundant country compared to the Foreign country. This implies that labor
productivity and thus wages are higher in Home country before Immigration.
Inspired by higher wages Foreign workers migrate to Home. Consequently production in Home
increases and falls in Foreign. But the international net change in production is positive immigrants
are more productive in Home compared to Foreign due to higher Land labor ratio. Immigration
continues until wage rates are equalized in the two countries. World income in higher by the area
ABC. Assuming that the immigrant labor becomes the citizen of Home country home national

welfare in higher by ABLL.

[12 pts] Problem 2: Outsourcing
Using an outsourcing model show that an increase the supply of skilled labor in India reduces
outsourcing benefits to US.
R&D

(PC/PR)

B
B
A

C
C
(PC/PR)W
(PC/PR)W
Components

Production of R&D increases with the increase in the supply of skilled labor in India. This leads
to a reduction of US terms of trade. As a result, US produces more components and less R&D
resulting in less produces of final good.

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[12 pts] Problem 3: Welfare Analysis of Trade Policy

(i) Show that for a small economy import tariff can be welfare reducing. Use
graphs and carefully label them to make your case.
(ii) What are the pitfalls of the above analysis? Under what assumptions the
analysis can be valid?

[12 pts] Problem 2: Trade Policy and Economic Growth

Make a case for protecting the manufacturing sector in a developing country.
Trade theory has very little to say about the effects of trade on economic growth.
Comparative advantage of a less developed country is typically in raw agricultural or mineral
products. Free trade and specialization implies that the country would be importing much of its
manufacturing products from abroad. But this deprives the country from technological
improvements because much of these improvements occur in the manufacturing sector. The
country would remain a poor agricultural or mineral producing country.
Under free trade manufacturing would be non-existent or very small. The country could increase
its economic growth rate if it created incentives for its manufacturing sector to develop larger.
Protection creates a larger than otherwise manufacturing sector which in turn leads to higher
technological improvement and thus larger overall economic growth rate.

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[9 pts] Problem 4: Quota versus Tariff in Home Monopoly

Malaysia decides to place the indicated quota on imported cell phones. In
Malaysia, there is a single firm that produces cell phones, though there are
many firms outside of Malaysia that can produce cell phones for price Pw.
Using the diagram, and adding additional markings as needed, answer the
following questions.

a) When Malaysia implements the quota, how many cell phones will the
Malaysian firm produce? Qm.
b) Label any domestic quota rents in your diagram.
The rectangle bounded by Pq above and Pw below, with bottom
length Qm.
c) How large is the "equivalent tariff"?
The equivalvent tariff is the tariff that causes the same level of
imports as the country has with the quota. It is found here by the
intersection of the marginal cost curve with residual demand. It is
the currency value given by the arrow above.

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