1. If Francis had an MRS of -3 between clothes and tea and Miguel has an MRS of
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Question
1. If Francis had an MRS of -3 between clothes and tea and Miguel has an MRS of -5 between clothes and tea (where the MRS is dT/dC = MUC/MUT), then
(a) trade is not going to happen because both want more clothes.
(b) Miguel will give up clothes and receive tea.
(c) Francis will give up clothes and receive tea.
(d) trade is not going to happen because both want more tea.
2. Japan has a comparative advantage in producing cars and the US has a comparative advantage in producing software. Which of the following statements is denitely NOT true?
(a) Japan will fully specialize in cars and the US will fully specialize in software.
(b) Japan will produce cars and software and the US produces only software.
(c) Japan will produce software and the US produces both cars and software.
(d) Japan will produce only cars and the US produeces both cars and software.
3. Considering her retirement portfolio choice, Barbara has two options: she can buy stocks with a high expected return and medium volatility (risk) and she can buy commodity futures with a low expected return and high volatility (risk). Barbara should buy commodity futures
(a) under no circumstances.
(b) if they are perfectly positively correlated with stocks.
(c) if they are suciently negatively correlated with stocks.
(d) only if she is risk-loving.
4. For a utility function of the type U(W) = W/, with < 1,
(a) a person’s relative risk aversion is always constant.
(b) a person’s absolute risk aversion increases in his or her wealth.
(c) a person’s relative risk aversion decreases in his or her wealth.
(d) a person’s absolute risk aversion is always constant.
5. Which of the following statements is NOT true?
(a) Private goods, such as an apple, are rivalrous and exclusive.
(b) Open-access common-property goods, such as sheries, are non-rivalrous and non-exclusive.
(c) Club goods, such as cable television, are non-rivalrous and exclusive.
(d) Public goods, such as national defense, are non-rivalrous and non-exclusive.
Explanation / Answer
1) Here the marginal rate of substitution shows the amount of tea forsaken for one unit of cloth . So Francis has to forgo 3 units of tea for 1 unit of cloth and on the other hand Miguel has to give up 5 units of tea for one unit of cloth . So Francis has comparative advantage in cloth production . Francis will export cloth and import tea .
(c) Francis will give up clothes and receive tea.
2) (c) Japan will produce software and the US produces both cars and software.
Japan will never produce only software since it has comparative advantage in cars .
3) (a) under no circumstances.
Since commodity futures have both negative qualities : low expected return and high risk .
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