Answers to Text Questions and Problems Chapter 15
Answers to Review Questions
The production possibilities curve is bowed outward from the origin for an economy that employs a
large number of workers, and reflects the principle of increasing opportunity cost; to produce a good, we
initially use the resources with the lowest opportunity cost and then move to those resources with a higher
Consumption possibilities are the combinations of goods and services that the citizens of a country
can feasibly consume. In a closed economy, which does not trade, people can only consume what is
produced domestically; that is, consumption possibilities equal domestic production possibilities. In an
open economy, domestically-produced goods can be exported in exchange for goods produced abroad. In
an open economy, consumption possibilities are usually greater than, and are never less than, the
economy’s production possibilities.
False. Even though a country may have an absolute advantage in every sector, there are likely to be
sectors in which the neighbouring advantage has a comparative advantage, that is, in which the
neighbouring country is relatively more efficient (i.e., relatively less inefficient) than the first country. If
the home country exports goods in which it has a comparative advantage, and imports goods in which its
neighbour has a comparative advantage, its consumption possibilities will be improved.
See Figure 15.8 (with automobiles replacing computers). The tariff raises the domestic price of
automobiles to the world price plus the tariff. Facing a higher domestic price for cars, domestic producers
supply more cars and domestic consumers demand fewer cars. Imports, the difference between the
domestic quantities demanded and supplied, decline. Consumers are hurt by the tariff, as they must pay
more for cars, while domestic producers (who receive a higher price for their output) are helped. The
government benefits by collecting tariff revenue. Overall, though, the tariff is inefficient; the costs to
consumers exceed the benefits to producers and the government.
See Figure 15.9 (with automobiles replacing computers). If the quota allows fewer imports than
would occur under free trade, then the domestic price will be higher than the world price. Consumers face
a higher price and are thus worse off; domestic producers, who receive a higher price for their output, are
better off. Unlike the case of a tariff, with a quota the government collects no revenue; those revenues
flow instead to holders of import licences, who can buy cars at the world price and re-sell them at the
higher domestic price.
Answers to Problems
This country can produce a maximum of 2400 television sets per year, or a maximum of 2400
refrigerators per year.