Question

4. Smith, A., found that if people are allowed to pursue their interests, the public will benefit by:

a. income taxes

b. allocation of resources

c. helping their neighbor

d. the invisible hand

5. The following could result in a monopoly

a. patent

b. free will

c. free trade

d. goodwill

6. The most relevant term in international trade theory is:

a. foreign exchange

b. accounting practices

c. comparative advantage

d. U.S. Law.

Answer 1

(4) According to Adam Smith, if all the individuals act in their own interes, the market will automatically be in equilibrum where demand and supply will equate. This was termed as the law of invisible hand. It was first intriduced in his book 'Wealth of Nations'. He said that economy will work well if government will leave the people alone to nuy and sell in the economy. Thus, the answer is (d) the invisible hand.

(5) In a monopoly, there is a single seller and a large number of buyers. The monopolist has the market power and sells goods which have no close substitutes. A patent gives the indidual/firm the licence to produce a particular good or service solely for a period of time. No other firm or individual can produce or sell that good/service. So a patent will give monopoly power to the firm/individual. Thus, the answer (a) patent.

(6) International trade theories analyzes the pattern of international trade, its origin and its implications on welfare. Many economists gave various trade theories. Theory of absolute advantage was given by Adam Smith which says that a country has absolute advantage in the production of a good/service if it can produce it in less costs or less amount of time. On the other hand, theory of comparative advantage was given by Ricardo which says that a country has comparative advantage in the production of a good/service when it can produce the good/service with lesser opportunity costs than other countries. These two terms absolute advantage and comparative advantage are most used in reference to international trade theory. Thus, the answer is (c) comparative advantage.