QUIZ #1 SOLUTIONS
To produce the first 35 units of gadgets, the firm must use 1 worker in
gadgets. This worker, therefore, can not be used in widgets. In other words,
instead of using 5 workers in widgets, only 4 workers can be used. As a
result, widget production falls from 30 to 28 widgets or 2 widgets are lost.
Since the equilibrium price has fallen and the equilibrium quantity has
risen, supply in the market must have increased and by more than any other
change in the market. Choice a) would cause equilibrium price to increase and
equilibrium quantity to increase. Choice b) would cause equilibrium price to
decrease and equilibrium quantity to decrease. Choice d) would cause
equilibrium price to increase and equilibrium quantity to decrease.
When a surplus exists, sellers are unable to sell all of the units they
want to sell at the current price. As a result, the price decreases. The
lower price of the product will increase the quantity demanded and decrease the
quantity supplied. The increase in quantity demanded occurs as a movement
along the demand curve (not a shift). Demand does not increase. The decrease
in quantity supplied occurs as a movement along the supply curve (not a
shift). Supply does not decrease.
An increase in the price of a product's input will cause the supply of
that product to decrease (shift to the left). As a result, the equilibrium
price increases and the equilibrium quantity decreases.
Canada can produce either 500 widgets or 300 gadgets or some combination
For every widget that Canada produces, it must give up .6 gadgets
due to the 500:300 ratio between widgets and gadgets (ie 500:300 = 1:.6).
Canada cannot produce 500 gadgets.
Also, it cannot produce 500 widgets and 300
gadgets at the same time.
Therefore, choices a and f are incorrect.
If Canada produced 100 widgets, it can produce up to 240 gadgets since it must
reduce gadget production from 300 to 240, a change of 60 (100 x .6).
Therefore, choices b and c are incorrect.
If Canada produced 300 widgets, it can produce up to 120 gadgets since it must
reduce gadget production from 300 to 120, a change of 180 (300 x .6).
Therefore, choice d is correct and choice e is not.
A graph is useful for answering this question.
Canada has an absolute advantage in both products since it can produce
more of each product than Mexico when using the same amount of resources.
Canada, the opportunity cost of producing 1 gadget is 1.67 widgets (since
300:500 = 1:1.67).
In Mexico, the opportunity cost of producing 1 gadget is
2 widgets (since 200:400 = 1:2).
Since Canada has a lower opportunity cost
than Mexico to produce gadgets, Canada has a comparative advantage in gadgets.
In Canada, the opportunity cost of producing 1 widget is .6 gadgets (since