Practice Problems (Module 1)

Use the following four graphs for Questions 1 - 2.

Question #1: Suppose Will makes a technological discovery that allows him to become more efficient in the production of GBD shirts but does NOT affect his ability to produce more GBD hats. Which graph shows the most likely impact on Will’s PPF?

A. A
B. B
C. C
D. D

A. A
B. B
C. C
D. D

When a technological discovery (or setback) happens that relates to only ONE product on the PPF, that is the only product affected. That means we can cross out any graphs that correspond to a change in GBD Hats (A, B, & C)...

...leaving us with answer choice D! This is the only graph that correctly only affects GBD Shirts. As stated in the problem, the technological discovery causes Will to be able to produce more GBD Shirts, resulting in the PPF expanding on the y-axis (corresponding to GBD Shirts).

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Question #1: Which of the price and quantity combinations in the accompanying graph represents the market of Nike Air Forces at competitive equilibrium?

A. \$70 and 80 shoes
B. \$20 and 50 shoes
C. \$40 and 100 shoes
D. None of the above

A. \$70 and 80 shoes
B. \$20 and 50 shoes
C. \$40 and 100 shoes
D. None of the above

Remember: The equilibrium point in a perfectly competitive market is located where your supply and demand curve intersect.

In our Nike Air Forces market, the supply and demand curves intersect at a quantity of 100 shoes and an equilibrium price of \$40!

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Question #1: Based on the opportunity cost for each trader, comparative advantage and _______ make it possible to achieve gains from trade between people, corporations, and countries.

B. Specialization
C. Production
D. Technology

B. Specialization
C. Production
D. Technology

When considering absolute advantage, the trading parties focus on their own production and their own capabilities without consideration of trade or their own opportunity costs. Therefore, answer choice A relates to part of our question, but not all, so let's cross it out.

B. Specialization
C. Production
D. Technology

Production is a key part of the initial process for trade, but production itself isn’t the method that results in total gain for society or both trading parties. With that considered, let's cross out answer choice B.

B. Specialization
C. Production
D. Technology

Technology is similar to production in the fact that it helps grow our markets, but isn’t the key method to maximize gains from trade. Therefore, we'll cross it out.

B. Specialization
C. Production
D. Technology

This leaves us with the correct answer choice B. Specialization allows countries to limit their work and production to areas of their strengths to create overall gains for society.

B. Specialization
C. Production
D. Technology