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A central feature of the human condition are vast disparities of wealth betweengroups of people in different countries and between different groups of peoplewithin countries. Related to this are large changes in wealth that have occurredto certain groups of people over time.Economic theory, as a social science devoted to understanding the humancondition, can explain why these differences in wealth exist and how to affectthem over time, i.e. what polices create wealth and make people richer.Economic theory tells us what conditions or policies lead to wealth creation, anactual increase in the total amount of goods and services produced. Wealthcreation, because more of everything is produced can make everybody better offwithout making anyone worse off.It is important to note that wealth creation is different than incomeredistribution. Income redistribution forcibly takes money from one group andgives that money to another group making one group better off at the expense ofmaking others worse off. Income redistribution does not increase the totalamount of wealth in the world. Making one group better off through incomeredistribution is not wealth creation.Economic theory tells us what conditions or policies can take the existingresources in the world, e.g. capital, labor, and technology, and reorder theproductive process so that more goods and services are produced with thoseexisting resources.Economic theory can also tell us what conditions and policies will take thatincrease in wealth and distribute it in an equitable fashion that leaves everyoneinvolved in the process better off.The policy that creates wealth is specialization according to comparativeadvantage and exchange.Typically this policy goes under the moniker free markets or capitalism.Question1A person or country has a comparative advantage if it can produce a good atlower opportunity cost than others.Choose all that are correcta. Comparative Advantage is an observation about the world.b. The existence of Comparative Advantage is simply a recognition that the worldis characterized by diversity.c. Greenland is cold. Honduras is warm. This difference in climate means certainplants are grown more easily in Honduras and that the opportunity cost ofproducing that plant is lower in Honduras. In economics, we describe thisdifference by saying that Honduras has a comparative advantage and Greenlandhas a comparative disadvantage in the production of that plant.d. Comparative Advantage creates wealth.e. If Comparative Advantage exists, adopting the correct policy creates wealthand distributes it equitably.Question2Opportunity Cost is defined as whatever must be given up to obtain an item,i.e. using the resources it takes to produce one pound of good, how many units ofanother good could the person produce with the same resources.The table below shows two people, Mo and Nina, who both own farms.The farms are different size, 100 and 50 acres, and they choose how much of theacreage on their farms gets planted in two crops.If they want more of one good, they must take acreage out of production of theother good. This increases production of the good they desire and reducesproduction of the other good.Choose all that are correcta. If Mo wants one more pound of rice, she must take acreage out of wheatproduction and plant rice on that land instead.b. If Mo shifted acreage out of wheat production, the amount of wheat she growswould fall.c. If Mo shifted acreage into rice production, the amount of rice she grows wouldincrease.d. If Mo increased rice production she is giving up wheat production.e. The opportunity cost of rice for Mo is how much wheat she would have to giveup to increase rice production.f. The opportunity cost of rice for Mo is how much wheat she would have to giveup for each extra unit of rice she produced.Question3Compute Opportunity Cost.OCGood A=Amount of Good B given up/Amount of Good A received.For instance, to compute the opportunity cost of rice for Mo, you would see whatwould happen if Mo shifted one acre of her farm out of wheat production andinstead used it grow rice. The amount of wheat grown would go down while theamount of rice grown would go up. The amount of wheat given up for eachadditional unit of rice grown would be the opportunity cost of rice for Mo.Choose all that are correcta. The opportunity cost of rice for Mo is 12 lbs. of wheat.b. The opportunity cost of rice for Mo is 6 lbs. of wheat.c. The opportunity cost of wheat for Mo is 12 lbs. of rice.d. The opportunity cost of wheat for Mo is 6 lbs. of rice.e. The opportunity cost of rice for Mo is .5 lbs. of wheat.f. The opportunity cost of rice for Mo is 2 lbs. of wheat.g. The opportunity cost of wheat for Mo is .5 lbs. of rice.h. The opportunity cost of wheat for Mo is 2 lbs. of rice.i. The opportunity cost of rice for Nina is 24 lbs. of wheat.j. The opportunity cost of rice for Nina is 48 lbs. of wheat.k. The opportunity cost of wheat for Nina is 24 lbs. of rice.l. The opportunity cost of wheat for Nina is 48 lbs. of rice.m. The opportunity cost of rice for Nina is .5 lbs. of wheat.n. The opportunity cost of rice for Nina is 2 lbs. of wheat.o. The opportunity cost of wheat for Nina is .5 lbs of rice.p. The opportunity cost of wheat for Nina is 2 lbs. of rice.q. Mo has a lower opportunity cost of producing wheat because for eachadditional lb. of wheat she wants to produce she gives up fewer lbs. of rice whenshe shifts land out of rice and into wheat production.r. Nina has a lower opportunity cost of producing wheat because for eachadditional lb. of wheat she wants to produce she gives up fewer lbs. of rice whenshe shifts land out of rice and into wheat production.s. Mo has a lower opportunity cost of producing rice because for each additionallb. of rice she wants to produce she gives up fewer lbs. of wheat when she shiftsland out of wheat and into rice production.t. Nina has a lower opportunity cost of producing rice because for each additionallb. of rice she wants to produce she gives up fewer lbs. of wheat when she shiftsland out of wheat and into rice production.A person, group of people, country, or society specializes in production whenit produces more of a good in which it has a comparative advantage andexchanges it for goods in which it has a comparative disadvantage.Specializing in production according to comparative advantage is a recipe forcreating wealth or increasing the production of goods and services withoutrequiring more inputs or better technology.A person, group of people, country, or society can enrich themselves collectivelyand individually if they specialize in the production of goods in which they have acomparative advantage and exchange for goods in which they have acomparative disadvantage.Question4Once opportunity cost has been computed, the patter of comparative advantagecan be determined.The pattern of comparative advantage is who is the cheapest, measured byopportunity cost, producer of each good.In this example, the person, Mo or Nina, that can produce rice with a loweropportunity cost has the comparative advantage in rice production.The person, Mo or Nina, that can produce wheat with a lower opportunity costhas the comparative advantage in wheat production.Choose all that are correcta. Mo has the comparative advantage in rice production.b. Nina has the comparative advantage in rice production.c. Mo has the comparative advantage in wheat production.d. Nina has the comparative advantage in wheat production.e. If Mo and Nina specialized in production according to comparative advantage,Mo would shift acreage out of rice and into wheat and Nina would shift acreageout of wheat into rice.f. If Mo and Nina specialized in production according to comparative advantage,Nina would shift acreage out of rice and into wheat and Mo would shift acreageout of wheat into rice.g. If Mo and Nina fully specialized in production according to comparativeadvantage, Nina would produce only rice and Mo would produce only wheat.h. If Mo and Nina fully specialized in production according to comparativeadvantage, Mo would produce only rice and Nina would produce only wheat.i. If Mo produced only rice and Nina produced only wheat, the total amount ofwheat and rice produced by Mo and Nina together would increase.j. If Mo produced only wheat and Nina produced only rice, the total amount ofwheat and rice produced by Mo and Nina together would increase.k. By specializing in production according to comparative advantage, Mo andNina are able to create wealth, i.e. increase the amount of rice and wheatproduced without requiring more productive resources or an improvement intechnology.Bee and LekThis is an exam question from a previous semester.Consider 2 farmers-Bee and Lek.On her 10 acre farm, if Bee plants cashews she can grow 100 pounds of cashews for each acre she plants.If Bee plants rice instead she can grow 10 pounds of rice for each acre she plants.On her 20 acre farm if Lek plants cashews she can grow 50 pounds of cashews for each acre she plants. IfLek plants rice instead she can grow 500 pounds of rice for acre she plants.Question5How much rice and cashews will Bee and Lek collectively produce if they eachdivide the land on their farms evenly between rice and cashews?Select one:a. 75 lbs of cashews and 260 lbs of riceb. 150 lbs of cashews and 510 lbs of ricec. 1000 lbs of Cashews and 5050 lbs Riced. 600 lbs of cashews and 60 lbs of ricee. None of the aboveQuestion6What is the opportunity cost of producing cashews for Bee and Lek?Select one:a. 10 for Bee and 1/10th for Lekb. 100 for Bee and 50 for Lekc. 10 for Bee and 5 for Lekd. 1/10th for Bee and 10 for Leke. None of the AboveQuestion7What is the Opportunity Cost of producing rice for Bee and Lek?Select one:a. 1/100th for Lek and 1/500th for Beeb. 1/10th for Lek and 10 for Beec. 10 for Lek and 1/10th for Beed. 100 for Lek and 500 for BeeQuestion8Who has the Comparative Advantage in Rice and Cashew production?Select one:a. Both have a Comparative Advantage in rice production.b. Bee has the Comparative Advantage in cashew production and Lek has theComparative Advantage in rice productionc. Lek has the Comparative Advantage in cashew production and Bee has theComparative Advantage in rice productiond. Both have a Comparative Advantage in cashew production.e. None of the AboveQuestion9Bee and Lek could collectively enrich themselves if:Select one:a. Bee and Lek could collectively enrich themselves if:b. Lek planted more rice and Bee planted more cashewsc. Both planted more riced. Both planted more cashews.e. None of the AboveQuestion10If Bee and Lek fully specialized according to Comparative Advantage they wouldproduce:Select one:a. An additional 11,000 lbs of rice.b. More cashews.c. More cashews and more rice.d. An additional 4950 lbs of rice.e. None of the Above.Question11After fully specializing according to Comparative Advantage, Bee and Lek couldenrich themselves individually by:Select one:a. Selling the good in which they have a Comparative Advantage and buying thegood in which they have a Comparative Disadvantage.b. Selling the good in which they have a Comparative Disadvantage and buyingthe good in which they have a Comparative Advantage.c. Consuming everything they produce.d. None of the answers are correcte. They have already enriched themselves individually because they haveincreased rice production while keeping cashew production constant.f. They have already enriched themselves individually because they haveincreased cashew production while keeping rice production constant.Question12If Bee and Lek exchanged 500 pounds of cashews for 500 lbs of rice:Choose all that are correcta. Neither would end up better off after specialization and exchange.b. Both Bee and Lek would have enriched themselves individually fromspecialization and exchange.c. A pound of cashews would cost 100 pounds of rice.d. The price of rice in exchange in 1 lb. of cashews.e. The price of rice in exchange in 1 lb. of rice.Question13After fully specializing according to Comparative Advantage, if Bee and Lekexchanged 500 pounds of cashews for 500 lbs of riceChoose all that are correcta. Neither would end up better off after specialization and exchange.b. Both Bee and Lek would have enriched themselves individually fromspecialization and exchange.c. One party would be better off and the other party would be no worse off.d. A pound of rice would cost 10 pounds of cashews.e. Two of the answers are correctQuestion14Instead of exchange at a rate of 500 lbs.of rice for 500 lbs. of cashews, supposeBee and Lek exchanged at a rate of 500 lbs. of cashews for 1000 lbs. of rice.Choose all that are correcta. The price of 1 lb. of rice has risen.b. The price of 1 lb. of rice has fallen.c. The price of 1 lb. of cashews has risen.d. The price of 1 lb. of cashews has fallen.e. The price of rice and cashews doesn’t change.Question15Instead of exchange at a rate of 500 lbs.of rice for 500 lbs. of cashews, supposeBee and Lek exchanged at a rate of 500 lbs. of cashews for 1000 lbs. of rice.The price of rice at the second rate of exchange is:Answer:Question16Instead of exchange at a rate of 500 lbs.of rice for 500 lbs. of cashews, supposeBee and Lek exchanged at a rate of 500 lbs. of cashews for 1000 lbs. of rice.The price of cashews at the second rate of exchange is:Answer:Question17Instead of exchange at a rate of 500 lbs.of rice for 500 lbs. of cashews, supposeBee and Lek exchanged at a rate of 500 lbs. of cashews for 1000 lbs. of rice.At the second rate of exchange:Choose all that are correcta. The collective gain from specialization according to comparative advantage islarger.b. The division of the gain from specialization according to comparativeadvantage is different.c. The division of the gain from specialization according to comparativeadvantage goes to Lek.d. The division of the gain from specialization according to comparativeadvantage goes to Bee.e. At the second rate of exchange, Bee ends up with 500 lbs. more rice and thesame amount of cashews compared to the first rate of exchange.f. At both rates of exchange, Bee and Lek are collectively better off afterspecialization and exchange.g. At both rates of exchange, Bee and Lek are individually better off afterspecialization and exchange.h. At the second rate of exchange, Bee is more better off and Lek is less betteroff after specialization and exchange.i. The is a range of rates of exchange where after exchange both parties arebetter off. What differentiates these rates of exchange is that they divide theextra output from specialization according to comparative advantage in differentproportions between Bee and Lek.Question18Consider two countries, Vietnam and the United States which produce twoagricultural goods, rice and wheat. The table below shows the total amount ofacreage devoted to farming in each country and how much rice or wheat can begrown if one acre of land is devoted to rice or wheat production.Total acreageRice grown on 1 acreWheat grown on 1 acreUnited States500,000 acres100 lbs.500 lbs.Vietnam100,000 acres1000 lbs.100 lbs.Confirm the existence of comparative advantage by computing opportunity costs and filling in the tablebelow. What is the pattern of comparative advantage?Opportunity CostRiceWheatUnited StatesQuestion 1Question 2VietnamQuestion 3Question 4What is the opportunity cost of producing rice for the United States?Answer:What is the opportunity cost of producing wheat for the U.S.?Answer:What is the opportunity cost of producing rice for Vietnam?Answer:What is the opportunity cost of producing wheat for the Vietnam?Answer:What is the pattern of comparative advantage?Choose all that are correcta. The U.S. has a comparative advantage in rice production.b. The U.S. has a comparative advantage in wheat production.c. Vietnam has a comparative advantage in rice production.d. Vietnam has a comparative advantage in wheat production.Question19Suppose that the U.S. and Vietnam do not specialize according to comparative advantage and exchangebut, instead, choose to be self sufficient. Further, they devote 1/2 the acreage in each country to rice andwheat production and each country consume everything they produce domestically. Fill in the appropriatecells in the table on the next page.Next, suppose that the U.S. and Vietnam fully specialize according to comparative advantage. Fill in theappropriate column in the table showing what happens to the collective production of rice and wheat afterspecialization.The Outcome Without TradeWhat they Produce andConsume if they do not specializeaccording to comparativeadvantage.The Outcome With TradeWhat TheyProduce if theyfully specializeaccording toWhatTheyTradeThe Gains From TradeWhat TheyConsumeThe Increase in Consumptioncomparativeadvantage.Question 6 RiceProducedQuestion 13.Rice ProducedPoint AUSAPointA*A to A*Question 7. WheatProduced.Question 14.Wheat ProducedQuestion 8. RiceProducedQuestion 15.Rice ProducedVietnamPoint BQuestion 9. Wheatproduced.PointB*Question 16.Wheat ProducedB to B*How much rice will the US produce before specialization according to comparative advantage?Answer:How much wheat will the US produce before specialization according tocomparative advantage?Hint: before specialization, each country uses half their acreage to produce eachcrop.Answer:How much rice will Vietnam produce before specialization according tocomparative advantage?Answer:How much wheat will Vietnam produce before specialization according tocomparative advantage?Answer:Collectively, how much rice does the U.S. and Vietnam produce beforespecialization according to comparative advantage.Answer:
