International Economics Dean Appleyard 9e - Test Bank

International Economics Dean Appleyard 9e – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

CHAPTER 5

INTRODUCTION TO NEOCLASSICAL TRADE THEORY:

Tools to Be Employed

 

1. Essay Questions

 

1. Suppose that, from an initial individual consumer equilibrium position in the indifference curve-budget line diagram, the prices of both goods rise by 10 percent.  What happens to the position and slope of the budget line?  Why does the consumer’s level of satisfaction from a given money income fall?  Illustrate and explain.  Would it be acceptable for an economist to say that the level of satisfaction of the consumer fell by exactly 10 percent?  Why or why not?

 

Answer: The budget line shifts inward in a parallel manner. The slope is unchanged. The consumer will now be on a lower indifference curve. No, it cannot be claimed that the level of satisfaction of the consumer fell by exactly 10 percent.

 

Difficulty: 02 Medium

Topic: The Theory of Consumer Behavior

AACSB: Analytical Thinking

Blooms: Understand

Learning Objective: 05-01

 

2. Suppose that, from an initial individual consumer equilibrium position in the indifference curve-budget line diagram, the price of good X rises while the price of good Y falls. What will happen to the relative consumption of the two goods by the consumer and why?  Can it be specified whether the consumer’s level of satisfaction has increased or decreased because of this change in absolute and relative prices?  Why or why not?  Could the satisfaction level of some consumers increase and the satisfaction level of other consumers decrease because of the price changes?  Explain.

 

Answer: Consumption will shift toward the lower priced good, i.e., the consumer substitutes the now cheaper good for some of the now relatively more expensive good. The consumer’s level of satisfaction may rise, fall, or stay the same.

 

Difficulty: 03 Hard

Topic: The Theory of Consumer Behavior

AACSB: Analytical Thinking

Blooms: Analyze

Learning Objective: 05-01

 

3. “If constant returns to scale exist for a firm, then a 10 percent rise in all factor prices will lead to a 10 percent decline in the equilibrium quantity of output for a given budget. However, if increasing returns to scale exist, a 10 percent rise in all factor prices will lead to a less than 10 percent decline in the equilibrium quantity of output for a given budget.”

 

Assess the validity of this statement.

 

Answer: This statement is not valid. The concept of “returns to scale” only refers to the relationship between a proportional change in all inputs and the corresponding change in output.

 

Difficulty: 03 Hard

Topic: Production Theory

AACSB: Analytical Thinking

Blooms: Evaluate

Learning Objective: 05-02

 

4. Explain, using the isoquant-isocost diagram, why a rise in the rental rate of capital coupled with no change in the wage rate will lead to a rise in the price of the capital-intensive good relative to the price of the labor-intensive good.

 

Answer: The prices of both goods will rise, but the price increase of the capital-intensive good will be relatively greater since it uses relatively more of capital.

 

Difficulty: 02 Medium

Topic: Production Theory

AACSB: Analytical Thinking

Blooms: Understand

Learning Objective: 05-02

 

5. Explain why any point on an economy’s PPF must be associated with a point on the production efficiency locus in the Edgeworth box diagram.

 

Answer: The PPF is essentially a reformatted version of the production efficiency locus. They convey the same info in a different “setting.”

 

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

6. The textbook has developed the Edgeworth box diagram and the concept of the production efficiency locus or contract curve in the context of the production of two goods with two factors.  Apply the Edgeworth box apparatus to the context of consumption of two goods by two consumers, and, in particular, explain how welfare for the two consumers as a whole when on the contract curve relates to welfare when the consumers are not on the contract curve.

 

Answer: Points off the contract curve depict inefficient allocations in the sense that one or both consumers can be made better off by a redistribution of the goods (with no consumer suffering a loss)

.

Difficulty: 03 Hard

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Analytical Thinking

Blooms: Create

Learning Objective: 05-03

 

1. Multiple-Choice Questions

 

7. In the following Edgeworth box diagram for a country’s production,

 

 

1.      point T has greater output of the A good than does point R.
2. output of the A good is greater at point S as at point R.
3. a plotting of the output combinations along the “diagonal” results in the production-

possibilities frontier for this country.

1.   good A is the relatively labor-intensive good and good B is the relatively capital-

intensive good.

 

Answer: a

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

8. In the diagram in Question #7 above,

 

1. a movement from point S to point T involves an increase in the capital/labor ratio

used in the production of good A.

1. if the PPF is plotted from the “contract curve” (or “production efficiency locus”), the

production combination of goods A and B associated with point R is on the PPF.

1. if the PPF is plotted from the “contract curve” (or “production efficiency locus”), with

good A on the vertical axis and good B on the horizontal axis, the production

combination of goods A and B associated with the 0_B origin is at the origin of the

PPF graph.

1.    if the PPF is plotted from the “contract curve” (or “production efficiency locus”),

with good A on the vertical axis and good B on the horizontal axis, the production

combination of goods A and B associated with point T is further up the vertical

axis than the production combination associated with point S.

 

Answer: d

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

9. In the diagram in Question #7 above, a movement from point S to point T will lead to

__________ in the capital/labor ratio used in the production of good A and __________

in the capital/labor ratio used in the production of good B.

 

1. an increase;  will lead to a decrease
2. an increase;  also will lead to an increase
3.     a decrease;  also will lead to a decrease
4. a decrease;  will lead to an increase

 

Answer: c

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

10. If, for a consumer, (MU_A/P_A) is greater than (MU_B/P_B), then the consumer

 

1. has an incentive to consume relatively more of good A, which will increase his/her

MU_A.

1.     has an incentive to consume relatively more of good A, which will decrease his/her

MU_A.

1. has an incentive to consume relatively more of good B, which will increase his/her

MU_B.

1. has an incentive to consume relatively more of good B, which will decrease his/her

MU_B.

 

Answer: b

Difficulty: 01 Easy

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

11. In the following table of production possibilities for a country,

 

  Good X       Good Y 

 

0 units         13 units

1 unit           10 units

2 units           6 units

3 units           0 units

 

there are __________ opportunity costs in the production of good X, and there

are __________ opportunity costs in the production of good Y.

 

1.     increasing;  increasing
2. increasing;  constant
3. constant;  increasing
4. constant;  decreasing

 

Answer: a

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

12. Two indifference curves for an individual consumer __________ intersect; two

community indifference curves for a country __________.

 

1. cannot; also cannot intersect
2.     cannot;  can intersect under some circumstances
3. can; can also intersect under some circumstances
4. can; cannot intersect

 

Answer: b

Difficulty: 01 Easy

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

13. Which one of the following sequences of specifications of relative preferences for bundles of goods A, B, and C by a consumer indicates the property of transitivity (where “>” indicates that the preferred bundle is on the left, “<” indicates that the preferred bundle is on the right, and “=” means indifference between the bundles)?

 

1. A > B; B > C;  C > A
2. A > B;  B = C;  C = A
3.    A < B;  C < A;  B > C
4. A = C; B > C;  A > B

 

Answer: c

Difficulty: 01 Easy

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

14. In the following table of production possibilities for a country,

 

  Good X         Good Y 

 

400 units           0 units

300 units       100 units

200 units       180 units

100 units       240 units

0 units       280 units

 

there are __________ opportunity costs when moving to greater production of good X

and __________ when moving to greater production of good Y.

 

1.   increasing;  decreasing
2. decreasing;  constant
3. constant;  increasing
4.   increasing;  increasing

 

Answer: d

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

15. Suppose that, in the isoquant-isocost diagram, with given relative factor prices, an

equilibrium input combination of 10 units of capital and 30 units of labor yields an

output level for the firm of 120 units.  Suppose that, for this firm, at the same relative

factor prices but with a larger budget, an equilibrium input combination of 15 units of

capital and 45 units of labor yields an output level of 160 units. Viewing these input-

output relationships, an economist would say that, in its production process, this firm

experiences

 

1. increasing returns to scale.
2. constant returns to scale.
3.     decreasing returns to scale.
4. increasing returns to scale, constant returns to scale, or decreasing returns to scale –

cannot be determined without more information.

 

Answer: c

Difficulty: 01 Easy

Topic: Production Theory

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-02

 

16. In the Edgeworth box diagram for production,

 

1. a point off the “contract curve” (or “production efficiency locus”) cannot have more

production of one of the goods than can some point on the curve.

1. a point off the “contract curve” (or “production efficiency locus”) can involve more

production of both goods than can any point on the curve.

1.     a movement from autarky to trade can be associated with a movement along the

“contract curve” (or “production efficiency locus’).

1. the “contract curve” (or “production efficiency locus”) will always be the “diagonal”

of the box.

 

Answer: c

Difficulty: 02 Medium

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-03

 

17. In the following graph showing an isoquant and an isocost line, at point X,

 

 

 

MPP_L/MPP_K is __________ w/r and the producer has an incentive to use relatively more

__________ in producing the given output.

 

1. greater than; capital
2. greater than; labor
3.     less than;  capital
4. less than;  labor

 

Answer: c

Difficulty: 01 Easy

Topic: Production Theory

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-02

 

18. In the Edgeworth box diagram in production with two goods and two factors of production,

 

1. a movement from any point off the “production efficiency locus” (“contract curve”)

to any point on the locus must involve greater production of one good and less

production of the other good.

1. a movement from any point on the “production efficiency locus” (“contract curve”)

to any point off the locus must involve less production of both goods.

1. a point that is off the “production efficiency locus” (“contract curve”) must be

associated with unemployment of at least one of the factors of production.

1.    a movement from any point on the “production efficiency locus” (“contract curve”)

to another point on the locus must involve greater production of one good and

less production of the other good.

 

Answer: d

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03

 

19. The equilibrium condition for consumer behavior pertaining to goods A and B is

__________.

 

1. (MU_B/P_A) = (MU_A/P_B)
2. MU_B = MU_A
3. (MPP_B/MPP_A) = (P_B/P_A)
4.     (MU_B/MU_A) = (P_B/P_A)

 

 

Answer: d

Difficulty: 01 Easy

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

20. You are given the following two possible community indifference curve maps for a country, where curves S₁ and S’₁ pertain to income distribution #1 and curves S₂ and S’₂ pertain to income distribution #2:

The differing shapes of the curves in these two maps could reflect the fact that in income distribution #2, in comparison with income distribution #1, a greater share of total income is held by individuals who value __________.  In addition, in this diagram, point B is preferred to point A __________.

 

1. good X relatively more highly than good Y; on the basis of income distribution #2 but                 not on the basis of income distribution #1
2. good X relatively more highly than good Y; on the basis of income distribution #1 but                 not on the basis of income distribution #2
3.   good Y relatively more highly than good X;  on the basis of income distribution #2 but                 not on the basis of income distribution #1
4.     good Y relatively more highly than good X;  on the basis of income distribution #1 but                 not on the basis of income distribution #2

 

Answer: d

Difficulty: 02 Medium

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-01

 

21. The slope of a consumer indifference curve at any given point on the curve reflects

(ignoring the negative sign)

 

1. the marginal rate of transformation (MRT) in production of one commodity into the

other commodity.

1. the marginal rate of technical substitution (MRTS) between the factors of production.
2. the relative prices of the commodities in the consumption bundle of goods.
3.     the marginal rate of substitution (MRS) of the consumer between the two goods.

Answer: d

Difficulty: 01 Easy

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-01

 

22. A production isoquant shows the various combinations

 

1.    of two factors of production that can produce the same amount of output of a good.
2. of two factors of production that can be hired by a firm for the same cost.
3. of two goods that can be produced by the firm with the same quantity of the factors of

production.

1. of two goods that bring an equivalent satisfaction level to an individual consumer.

 

Answer: a

Difficulty: 01 Easy

Topic: Production Theory

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-02

 

23. The equilibrium condition for producers (i.e., the condition that exists when the isocost

line is tangent to an isoquant) is __________.

 

1. (MPP_L/r) = (MPP_K/w)
2.     (MPP_L/MPP_K) = (w/r)
3. (MU_B/MU_A) = (P_B/P_A)
4. (MU_B/P_A) = (MU_A/P_B)

 

Answer: b

Difficulty: 01 Easy

Topic: Production Theory

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-02

 

24. Given the following table showing various combinations of goods X and Y that bring equal satisfaction to an individual consumer:

 

good X           good Y

 

2 units           10 units

3 units             9 units

4 units             6 units

5 units             2 units

 

In this table, as the individual consumes a greater amount of X, a __________ amount of good Y is given up for each additional unit of good X.  This pattern suggests that, as more of good X is consumed and less of good Y is consumed, the ratio MU_X/MU_Y is __________.

 

1.    larger;  increasing, which contradicts economists’ usual expectations
2.   larger;  decreasing, which conforms to economists’ usual expectations
3. smaller;  increasing, which contradicts economists’ usual expectations
4. smaller;  decreasing, which conforms to economists’ usual expectations

 

Answer: a

Difficulty: 02 Medium

Topic: The Theory of Consumer Behavior

AACSB: Reflective Thinking

Blooms: Understand

Learning Objective: 05-01

 

25. The curve in the following diagram is called an __________, and its slope (ignoring the

negative sign) indicates the ratio __________.

 

 

a..  isoquant;  w/r

1.     isoquant;  MPP_L/MPP_K
2. isocost line; w/r
3. isocost line;  MPP_L/MPP_K

 

Answer: b

Difficulty: 01 Easy

Topic: Production Theory

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-02

 

26. Suppose that, in the context of the Edgeworth box diagram in production, there are

constant returns to scale in each of the two industries and that one good is relatively

labor-intensive in its production process and the other good is relatively capital-intensive

in its production process.  In considering this Edgeworth box diagram and the PPF that

can be derived from it,

 

1. all points on the “diagonal” of the Edgeworth box diagram will have corresponding

points on the PPF.

1. no point on the “diagonal” of the Edgeworth box diagram will correspond to a point

on the PPF.

1.    the PPF will show increasing opportunity costs.
2. the PPF will show constant opportunity costs.

 

Answer: c

Difficulty: 01 Easy

Topic: The Derivation of the Production Possibilities Frontier

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 05-03