Question

England has a relatively cool and cloudy climate that is ill suited for grape growing. It can produce 200 units of wine for every 400 units of cloth. Portugal, in contrast, has a relatively warm and sunny climate that is good for growing grapes. It can produce 200 units of wine for every 100 units of cloth. Which country has the higher opportunity cost of producing cloth?

1. Portugal: ½ unit of wine for every unit of cloth
2. England: ½ unit of cloth for every unit of wine
3. Portugal: 2 units of wine for every unit of cloth
4. England: 2 units of wine for every unit of cloth

Assume that Nation X can produce either 40 notepads or 80 pens, and that Nation Y can produce either 10 notepads or 40 pens. This implies that

1. Nation X has a comparative advantage in producing pens.
2. Nation Y has a comparative advantage in producing notepads
3. Nation X has a comparative advantage in producing notepads.
4. Nation Y is the high-cost producer of pens.

The principle of comparative advantage indicates that mutually beneficial international trade can take place only when

1. tariffs are eliminated.
2. transportation costs are almost zero.
3. relative costs of production differ between nations.
4. a country can produce more of some product than other nations can.

When a nation removes restrictions on imported products that nation will

1. experience higher prices and consume lower quantities.
2. experience higher prices and consume higher quantities.
3. experience lower prices and consume lower quantities.
4. experience lower prices and consume higher quantities.

A key difference between import quotas and voluntary export restrictions (VERs) is that

1. the domestic government may unilaterally enact the former, whereas the latter requires cooperation from a foreign government or foreign producers.
2. the former requires cooperation from a foreign government or foreign producers, whereas the domestic government may unilaterally enact the latter.
3. one is a tax, whereas the other is a quantity limit.
4. one raises the price of the imported product involved, whereas the other does not.

Answer 1

1. England's opportunity cost of producing cloth = 200/400= 1/2 units of wine.

And Portugal's opportunity cost of producing cloth = 200/100= 2 units of wine.

This means that Portugal has the higher opportunity cost of producing cloth i.e 2 units of wine for every unit of cloth . Hence,option(C) is correct.

2. Nation X's opportunity cost of producing notepads = 80/40= 2 pens.

Nation Y's opportunity cost of producing notepads =40/10 = 4 pens.

Because Nation X has the lower opportunity cost for the production of notepads, this implies that Nation X has the comparative advantage in producing notepads and Nation Y would have the comparative advantage in producing pens. Hence,option(C) is correct.

3. The principle of comparative advantage indicates that mutually beneficial international trade can take place only when relative costs of production differ between nations. Hence,option(C) is correct.

4. When a nation removes restrictions on imported goods that Nation will experience lower price and consume higher quantities. Hence,option(D) is correct.

5. A key difference between import quotas and voluntary export restraints is that the domestic government may unilaterally enact the former , whereas the latter requires cooperation from a foreign government or foreign producers. Hence,option(A) is correct.