Quiz Answers

Hi All, I have haven't graded the quiz yet, but these are my answers to those questions.

1.       A small, open country is equally productive in producing coffee and tea.  What will this economy produce if the world price of coffee is twice that of tea?  Half that of tea?  What will the country produce if the world price of coffee happens to equal the world price of tea?


Equally productive means that the cost of one unit of coffee is equal to a gain of one unit of tea.  Or in quantitative terms, if that country can produce 30 units of tea, it can also produce 30 units of coffee.  Now, if the world price of coffee is twice that of tea, lets say $2 per unit for coffee and $1 per unit of tea, then that country would gain more by specializing in coffee than in tea.  If that country produces 30 units of coffee at $2 per unit, that is $60 total.  That country would only be able to produce $30 ($1 x 30) worth of tea.  


If coffee was half the price of tea (lets leave tea at $1 and let coffee be $0.50), then tea is more expensive.  Consequently, the country should produce tea, earning $30 instead of $15.  


If the world price of tea and coffee were equal, then it doesn't matter what the country produces, as it would still earn the same amount by producing both equally, or specializing in one or the other.  


2.       True of false: If a country is more productive in every sector than a neighboring country, then there is no benefit in trading with the neighboring country.  Explain.  


This is false.  Trade between countries depends depends not on absolute advantage but on competitive advantage.  For example, in the last chapter we did a problem comparing the ROK and the USA in producing radios and chemicals.  The ROK was more productive than the USA in that it could produce 30k radios or 30 tons of chemicals.  The USA, however, had a competitive advantage in chemicals because the cost of one unit of chemicals was 2 radios.  The ROK, on the other hand, could produce one unit of chemical at a cost of only one radio.  Therefore, between these two countries, it made sense that the USA and Korea should specialize, with the USA producing 20 tons of chemicals and the ROK producing 30k radios.