Question

Suppose Nicaragua has an absolute advantage over other countries in producing sugar, but othercountries have a comparative advantage over Nicaragua in producing sugar. If trade in sugar is allowed, Nicaragua:

will import sugar.
		will export sugar.
		will either import sugar or export sugar, but it is not clear from the given information.
		would have nothing to gain either from exporting or importing sugar.

2. Which if the following statements is true about inelastic demand?

A. Demand is inelastic when elasticity is > 1.

B. Demand is inelastic when elasticity = 1.

C. Demand is inelastic when elasticity < 1.

D. Demand can be inelastic in any of these scenarios.

3. How does a price floor above equilibrium affect the market?

It creates a shortage
		It creates a surplus
		There is no effect on the market because the price would remain at equilibrium.
		There is not enough information to answer this question.

Answer 1

a) Option A - Nicaragua will import sugar

The absolute advantage is the situation where an economic agent such as a country or a firm or a person can produce goods by consuming lower resources than it competitors. However, that does not mean it could generate the highest profit. The higher benefits can be achieved by producing goods in which an economic agent has a comparative advantage. A comparative advantage is the scenario in which an economic agent can produce a good at lower opportunity cost. It means that economic agent can benefit by specializing in that good and trading with others.

b) Option C - Demand is inelastic when elasticity < 1

The price elasticity of demand is calculated by taking into account the ratio of percentage change in quantity to percentage change in the price. If the percentage change in demand is more than the percentage change in the price then the PED will be more than 1 and it indicates the elastic demand.
However, if the percentage change in demand is lower than the percentage change in price then the PED will be less than 1 and it is inelastic demand.

c) Option B - It creates a surplus

The equilibrium price and quantity is the function of the market forces. The supply and demand decides the price where buyer and seller agree to transact with each other without any external intervention. However, sometimes the government could interfere in the market to create a price ceiling or a price floor. The price floor is the minimum price of a product must be paid by the buyer. If the price floor is set above the equilibrium price then demand will be lower while supply will be higher and that creates a surplus in the market,