Question

Speculator in Venezuela have recently come to believe that Venezuela's supply of petroleum next year will fall relative to Venezuela’s demand for petroleum next year. Upon learning about this belief held by speculators, Generalissimo Fisto, the military leader of Venezuela, outlaws all speculation in petroleum in Venezuela. One consequence of this dictate will be that

(a) Both the current and the future prices of petroleum in Venezuela will be lower than they would be with speculation

(b) Both of the current and the future prices of petroleum in Venezuela will be higher than they would be with speculation

(c) The current price of petroleum in Venezuela will be higher while the future price will be lower than they would be with speculation

(d) The current price of petroleum in Venezuela will be lower while the future price will be higher than they would be with speculation

The government of the (frictional) country of Kortula taxes income using a proportional tax system. This government raises the income- tax in Kortula from 35 % to 46 percent. The result will be

(a) More revenue for the government of Kortula

(b) Less revenue for the government of Kortula

(c) Unchanged revenue for the government of Kortula

(d) Possibly any one of the above ( that is , a or b or c)

Economists’ case for free trade depends upon which of these statements being true?

(a) No worker ever loses his or her current job because of an increase in imports

(b) Free trade generates high and rising current-account surpluses in the domestic economy.

(c) Free trade generates both current-account and capital- account balances of $0, year in and year out.

Which of the following will not case the demand for eggs to rise?

(a) An increase in the supply of eggs

(b) Consumers tastes changes such that they come to like eggs more

(c) Eggs are a normal good and consumers income rise

(d) Bacon is a complementary good to eggs and the price of bacon falls

It’s possible for producer in one country to have a comparative advantage over producers in every other country at producing every good and service desired by consumers.

(a) True

(b) False

Answer 1

1) If the speculation were true, both current and future prices must have risen. This is because due to scarcity of petroleum , the supply curve for petroleum will shift to the left. As a result, prices must rises. However, when the speculations were outlawed by the military leader, it will help in lowering future prices of petroleum. Hence, although the current prices are higher, future prices must fall down. Among all the options, c is the appropriate answer.

2) A proportional tax is generally considered regressive for the economy as it equally taxes all its citizens. Now, with increase in proportional taxes from 36% to 45%, the government of Kortula earns a higher tax revenue. Here, option a is the appropriate answer. Options b and c are incorrect because government revenues increases with the tax.

3) Conditions for free trade with respect to economist's assumptions holds that no worker must lose their jobs with increase in imports. Hence, option a is correct. Capital account and current account surpluses are subject to change with free trade hence, option b and c are incorrect.

4) From option a ,with increase in supply of eggs, there will not be any change in the demand for eggs. From option b, when consumers likes eggs more, demand for eggs rises. From option c, when consumer's income rises and eggs being a normal good, demand for eggs rises. From option d, if bacon is a complementary good to eggs and price of bacon falls, then, demand for both eggs and bacon rises. From all the options, option a is correct as it suggests no change in demand for eggs.

5) It is not possible to have a comparative advantage over every good produced by a country. This is because resources vary from country to country and not all resources can be cheapest in a single country. Hence, the given statement is false.