Test Questions with Answers
Chapter 15. Market Theory I.
Definition of Markets and Their Functions. Ricardo's Competitive Advantage
Chapter 15 ― Question 1
The output per worker in the USA and Great Britain is as follows:
| USA | GB | |
| Product A | 3 | 6 |
| Product B | 5 | 6 |
1) Which country has an absolute advantage in A?
2) Which country has an absolute advantage in B?
3) Which country has a comparative advantage in A?
4) Which country has a comparative advantage in B?
*1) GB
*2) the USA
*3) GB. 1 A costs 1 B; in the USA 1 A costs 5 Bs.
*4) the USA. One B costs 1/5 A; in GB one B costs 1 A.
Questions 3 and 4 require calculating opportunity costs. To find out the opportunity costs of 1 American B, divide what America gives up by what it gains. 15 Bs cost 3 A. 1 B costs 3/15 A or 1/5 A.
Chapter 15 ― Question 2
The table below shows that Lily can type 10 pages in a day or translate 6 pages while Maria can type 12 pages or translate 4 pages.
| Typed Pages per Day | Translated Pages per Day | |
| Lily | 10 | 6 |
| Maria | 12 | 4 |
For Lily the opportunity cost of typing one page is
- 10 typed pages
- 6 translated pages
- 1.66 translated pages
- 0. 6 translated page
*D. 10 typed pages cost 6 translated pages, so 1 typed page costs 0.6 translated page.
Chapter 15 ― Question 3
Refer once more to the above table. Which of the following statements is not correct?
- Maria has an absolute advantage in typing
- Lily has an absolute advantage in translating
- Maria has a comparative advantage in translating
- Lily has a comparative advantage in translating. Maria has a comparative and an absolute advantage in typing
*C. An absolute advantage can be seen at one glance. Lily translates more pages in a day, Maria types more pages.
Determining a comparative advantages requires the calculation of opportunity costs.
Maria's opportunity costs of typing one page are 0.33 translated page, that is less than Lily's 0.6 page.
Maria's opportunity costs of translating one page are 3 pages, that is more than Lily's 1.6 pages.
Chapter 15 ― Question 4
Your roommate and you have to write a paper for your economics class. It requires very much researching. You have realised too late that it is due the day after tomorrow. You are better at writing and at researching than your roommate. Why would any economist in the world - with the exception of your instructor - recommend that one of you should do all the writing and the other one all the researching? Use the table below to make the point.
| Time needed for researching | Time needed for writing | |||
| You | 20 hours | 8 hours | ||
| Your roommate | 30 hours | 15 hours |
* Your opportunity costs for researching are 0.4
Your roommate's opportunity costs for researching are 0.5.
Your opportunity costs for writing are 2,5.
Your roommate's opportunity costs for writing are 2.0.
According to Ricardo's theory, you should do all the research, your roommate all the writing.
Chapter 15 ― Question 5
Let's ignore for a moment that your instructor is likely to find out that the two papers were written by the same student. Which important thing do economists ignore when they advocate Ricardo's theory?
* They ignore competition and its effects. This is very unusual for economists. Comparative advantage abolishes competition and its conducive effect on performance. Your good performance is in part motivated by the wish to excel others. The fact that you are superior to your roommate might ultimately encourage him to improve his performance. Economists stress that the application of Ricardo's theory improves overall output. This is true. Without co-operation between the two of you, your roommate would not have had time enough to complete his paper.
If you like, print this page for offline comparison or studying.