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Test #1

# Test #1 - LECTURE 3 A DEMONSTRATION OF SCARCITY THAT...

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SHOMU BANERJEE FALL 2011 TEST 1 ANSWERS Figure 1 1. Ahanu divides his time studying physics and economics. Fig. 1 shows the grade combinations that he can obtain. Both his professors require him to get 60 to pass and 90 to get an ‘A’. Ahanu realizes that a. he cannot pass both classes b. he can pass economics only if he fails physics c. he can pass physics only if he fails economics d. he can earn an ‘A’ in economics and still pass physics e. he can pass both classes 2. In Fig. 1, moving from a grade of 60 to 80 in economics a. has a higher opportunity cost than moving from 90 to 100 in economics b. has a lower opportunity cost than moving from 90 to 100 in economics c. has an indeterminate opportunity cost d. has an opportunity cost of 30 points in economics e. has an opportunity cost of 50 points in physics 3. Bill attends his 10:00-11:00 a.m. class regularly. Alternatively, he could spend that hour playing his favorite computer game which he values at \$0.25 per minute, or in his favorite chat room. He values each hour spent in the chat room at \$20. Bill cannot play computer games and visit the chat room at the same time. What opportunity cost does Bill incur each time he attends class? So the game is worth 0.25 x 60 = \$15, while the chat is valued at \$20. a. \$15 b. \$10 c. \$20—this is the next best alternative foregone d. \$35 e. none of the other alternatives

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Figure 2 Answer questions 4-7 based on the production possibilities for the US and Brazil shown in Fig. 2 above. 4. In Fig. 2, which of these alternatives regarding comparative advantage is correct? a. The US has a comparative advantage in cotton and Brazil in soy b. The US has a comparative advantage in soy and Brazil in cotton c. Neither country has a comparative advantage in cotton d. Neither country has a comparative advantage in soy e. There is not enough information to determine comparative advantage for either country 5. Suppose the US were to only produce soy while Brazil produces only cotton. Then both countries will be willing to trade 6. Suppose that both the US and Brazil were to specialize completely . If the terms-of-trade is 1 unit of soy for 2 units of cotton and the US sells 4 units of soy, Brazil will consume
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