Student name:__________

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
1) What major dimension sets apart international finance
from domestic finance?

D) all of the
A) Foreign exchange and political risks options
B) Market imperfections
C) Expanded opportunity set

2) An example(s) of a political risk is

D) both the
A) expropriation of assets. expropriation of assets and
B) adverse change in tax rules. adverse changes in tax
C) the opposition party being elected. rules are correct.

3) Production of goods and services has become

globalized to a large extent as a result of

and profits higher.

A) natural resources being depleted in one country D) common
after another. tastes worldwide for the
B) skilled labor being highly mobile. same goods and services.
C) multinational corporations' efforts to source
inputs and locate production anywhere where costs are lower

4) Recently, financial markets have become highly

integrated. This development

D) none of the
A) allows investors to diversify their portfolios options
internationally.
B) allows minority investors to buy and sell stocks.
C) has increased the cost of capital for firms.

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5) Japan has experienced large trade surpluses. Japanese
investors have responded to this by

currency.
A) liquidating their positions in stocks to buy dollar- D) lobbying the
denominated bonds. Japanese government to
B) investing heavily in U.S. and other foreign allow the yen to
financial markets. appreciate.
C) lobbying the U.S. government to depreciate its

6) Suppose your firm invests $100,000 in a project in compensation. This is an

Italy. At the time the exchange rate is $1.25 = €1.00. One year example of
later the exchange rate is the same, but the Italian government
has expropriated your firm's assets paying only €80,000 in

D) none of the
A) exchange rate risk. options, since $100,000 =
B) political risk. €80,000 × $1.25/€1.00.
C) market imperfections.

7) Suppose you start with $100 and buy stock for £50 dollars, you only get $45
when the exchange rate is £1 = $2. One year later, the stock since the pound has fallen
rises to £60. You are happy with your 20 percent return on the to £1 = $0.75. This loss of
stock, but when you sell the stock and exchange your £60 for value is an example of

D) weakness in
A) exchange rate risk. the dollar.
B) political risk.
C) market imperfections.

8) Suppose that Great Britain is a major export market depreciates against the
for your firm, a U.S.-based MNC. If the British pound U.S. dollar,

to the extent that your

A) your firm will be able to charge more in dollar dollar costs stay constant
terms while keeping pound prices stable. and your pound prices will
B) your firm may be priced out of the U.K. market, rise.

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 C) to protect U.K. market share, your firm may have firm may have to cut the
to cut the dollar price of your goods to keep the pound price dollar price of your goods
the same. to keep the pound price the
D) your firm may be priced out of the U.K. market, same.
to the extent that your dollar costs stay constant and your
pound prices will rise, and to protect U.K. market share, your

9) Suppose Mexico is a major export market for your drastically against the U.S.
U.S.-based company and the Mexican peso appreciates dollar. This means

D) your firm will

A) your company's products can be priced out of the be able to charge more in
Mexican market, as the peso price of American imports will dollar terms while keeping
rise following the peso's fall. peso prices stable and your
B) your firm will be able to charge more in dollar domestic competitors will
terms while keeping peso prices stable. enjoy a period of facing
C) your domestic competitors will enjoy a period of lessened price competition
facing lessened price competition from Mexican imports. from Mexican imports.

10) Suppose Mexico is a major export market for your

U.S.-based company and the Mexican peso depreciates
drastically against the U.S. dollar, as it did in December 1994.
This means that

facing little price

A) your company's products can be priced out of the competition from Mexican
Mexican market, as the peso price of American imports will imports.
rise following the peso's fall. D) none of the
B) your firm will be able to charge more in dollar options
terms while keeping peso prices stable.
C) your domestic competitors will enjoy a period of

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 D) none of the
A) your competitive position is likely improved. options
B) your competitive position is likely worsened.
C) your competitive position is unchanged.

12) Undoubtedly, we are now living in a world where all

the major economic functions—consumption, production, and
investment—

D) are highly
A) are still inherently local. globalized.
B) are still regional in nature.
C) are slowly becoming globalized.

13) Most governments at least try to make it difficult for movement of labor is an
people to cross their borders illegally. This barrier to the free example of

D) a market
A) information asymmetry. imperfection.
B) excessive transactions costs.
C) racial discrimination.

14) Although the world economy is much more integrated

today than was the case 10 or 20 years ago, a variety of
barriers still hamper free movements of people, goods,
services, and capital across national boundaries. These
barriers include

D) all of the
A) legal restrictions. options
B) excessive transportation costs.
C) information asymmetry.

15) The Japanese

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automobile company Honda decided to establish production
facilities in Ohio, mainly to

D) all of the
A) circumvent trade barriers. options
B) reduce transportation costs.
C) reduce transactions costs.

16) When individual investors become aware of overseas

investment opportunities and are willing to diversify their
portfolios internationally,

language.
A) they trade one market imperfection, information D) they should
asymmetry, for another, exchange rate risk. invest only in dollars or
B) they benefit from an expanded opportunity set. euros.
C) they should not bother to read or to understand
the prospectus, since it’s probably written in a foreign

17) The Nestlé Corporation, a well-known Swiss MNC,

used to issue two different classes of common stock, bearer
shares and registered shares, and foreigners were allowed to
hold only

C) voting shares.
A) registered shares. D) convertible
B) bearer shares. shares.

18) Deregulated financial markets and heightened

competition in financial services provided an environment for
financial innovations that resulted in the introduction of
various instruments. Examples of these innovative
instruments include

B) multicurrency
A) currency futures and options, foreign stock index bonds.
futures and options. C) international

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mutual funds, country funds, exchange traded funds.
D) all of the options

19) Nestlé, a well-known Swiss corporation,

there was a major transfer

A) has been a paragon of virtue in its opposition to of wealth from foreign
all forms of political risk. shareholders to domestic
B) at one time placed restrictions on foreign shareholders.
ownership of its stock. When it relaxed these restrictions, the D) none of the
total market value of the firm fell. options
C) at one time placed restrictions on foreign
ownership of its stock. When it relaxed these restrictions,

20) The goal of shareholder wealth maximization

D) is in conflict
A) is not appropriate for non-U.S. business firms. with the privatization
B) means that all business decisions and investments process taking place in
that a firm makes are done for the purpose of making the third-world countries.
owners of the firm better off financially.
C) is a sub-objective the firm should attempt to
achieve after the objective of customer satisfaction is met.

21) As capital markets are becoming more integrated, the

goal of shareholder wealth maximization

managers in Europe.
A) has been altered to include other goals as well. D) has been
B) has lost out to other goals, even in the U.S. shown to be a deterrent to
C) has been given increasing importance by raising funds abroad.

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 punished.
A) show that managers might be tempted to pursue D) show that
their own private interests at the expense of shareholders. socialism is a better way to
B) show that Italian shareholders are better at go than capitalism.
monitoring managerial behavior than U.S. shareholders.
C) show that white-collar criminals hardly ever get

23) While the corporate governance problem is not

confined to the United States,

a last resort, ensured that

A) it can actually be a much more serious problem any conflicts of interest
in other parts of the world, where the legal protection of would soon be a thing of
shareholders is weak or nonexistent. the past.
B) it has reached its high point in the United States. D) none of the
C) the U.S. legal system, with lawsuits used only as options

24) The owners of a business are the

C) suppliers.
A) taxpayers. D) shareholders.
B) workers.

25) The massive privatization that is currently taking place

in developing and formerly socialist countries

countries' citizens.
A) will eventually enhance the standard of living to D) all of the
these countries' citizens. options
B) depends on private investment.
C) increases the opportunity set facing these

26) A firm with concentrated ownership

dominant shareholders and

A) may give rise to conflicts of interest between small outside shareholders.

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 D) none of the
B) may enjoy more accounting transparency than options
firms with diffuse ownership structures.
C) is a partnership, never a corporation.

27) The ultimate guardians of shareholder interest in a

corporation are the

D) all of the
A) rank and file workers. options
B) senior management.
C) boards of directors.

28) In countries like France and Germany,

their most critical goal.

A) managers have often made business decisions D) managers
with regard to maximizing market share to the exclusion of have traditionally
other goals. embraced the
B) managers have often viewed shareholders as one maximization of
of the "stakeholders" of the firm, others being employees, shareholder wealth as the
customers, suppliers, banks and so forth. only worthy goal.
C) managers have often regarded the prosperity and
growth of their combines, or families of related firms, as

29) When corporate governance breaks down

C) the board of
A) shareholders are unlikely to receive fair returns directors is not doing its
on their investments. job.
B) managers may be tempted to enrich themselves at D) all of the
shareholder expense. options

30) Privatization refers

to the process of

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 D) a country
A) having government operate businesses for the divesting itself of the
betterment of the public sector. ownership and operation of
B) government allowing the operation of privately a business venture by
owned business only. turning it over to the free
C) prohibiting government operated enterprises. market system.

31) Deregulation of world financial markets

to directly invest in their

A) provided a natural environment for financial financial markets.
innovations, like currency futures and options. D) all of the
B) has promoted competition among market options
participants.
C) has encouraged developing countries such as
Chile, Mexico, and Korea to liberalize by allowing foreigners

32) The emergence of global financial markets is due in

no small part to

C) government
A) advances in computer and telecommunications regulation and protection
technology. of infant industries.
B) enforcement of the Soviet system of state D) none of the
ownership of resources of production. options

33) The common monetary policy for the euro zone is

now formulated by

D) the European
A) the Bundesbank in Germany. Central Bank.
B) the Federal Reserve Bank.
C) the World Bank.

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 C) Euro.
A) British pound. D) U.S. dollar.
B) Japanese yen.

35) Prior to World War I ending, the dominant global

currency was the

C) Japanese yen.
A) German mark. D) British pound.
B) French franc.

36) The ascendance of the dollar reflects several key

factors, such as

C) exchange rate
A) the size of the U.S. population. stability.
B) the mature and open capital markets of the U.S. D) all of the
economy. options

37) The euro

than the U.S. dollar.

A) is the common currency of Europe. D) all of the
B) is divisible into 100 cents, just like the U.S. options
dollar.
C) may eventually have a transaction domain larger

38) Since its inception the euro has brought about

revolutionary changes in European finance. For example,

B) Swiss bank
A) by redenominating corporate bonds and stocks accounts are all
from several different currencies into one common currency, denominated in euro.
the euro has precipitated the emergence of continent-wide C) the European
capital markets in Europe that are comparable to U.S. markets banking sector has become
in depth and liquidity. much more important as a

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source of financing for European firms. changes.
D) there have actually not been any revolutionary

39) In David Ricardo's theory of comparative advantage,

D) has been
A) international trade is a zero-sum game in which superseded by the now-
one trading partner's gain comes at the expense of another's orthodox view of
loss. mercantilism.
B) liberalization of international trade will enhance
the welfare of the world's citizens.
C) is a short-run argument, not a long-run argument.

40) Under the theory of comparative advantage,

liberalization of international trade will

their competitors.
A) enhance the welfare of the world's citizens. D) all of the
B) create unemployment and displacement of options
workers permanently.
C) result in higher prices in the long run as
monopolist are able to charge higher prices after eliminating

41) Privatization is often seen as a cure for bureaucratic

inefficiency and waste; some economists estimate that
privatization improves efficiency and reduces operating costs
by as much as

C) 15 percent.
A) 5 percent. D) 20 percent.
B) 10 percent.

42) The World Trade Organization, WTO,

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 violations.
A) has the power to enforce the rules of international D) ruled that
trade. NAFTA is to be the model
B) covers agriculture and physical goods, but not for world trade integration.
services or intellectual property rights.
C) recently expelled China for human rights

43) In November 2018, three member countries of

NAFTA signed a new accord called the

D) none of the
A) US-Mexico-Canada-Agreement above
B) New NAFTA Agreement
C) North American Agreement

44) In March 2018, a free trade area was created among

11 Pacific Rim Countries including”

Vietnam
A) Australia, Brunei, and Canada D) all of the
B) Chile, Japan, and Malaysia above
C) Mexico, New Zealand, Peru, Singapore, and

45) Privatization

limited to the local

A) has spurred a tremendous increase in cross- citizens.
border investment. D) has generally
B) has allowed many governments to have the funds decreased the efficiency of
to nationalize important industries. the enterprise.
C) has guaranteed that new ownership will be

46) The theory of comparative advantage

B) claims that
A) claims that economic well-being is enhanced if economic well-being is
each country's citizens produce only a single product. enhanced when all

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countries compare commodity prices after adjusting for D) claims that no
exchange rate differences in order to standardize the prices country has an absolute
charged all countries. advantage over another
C) claims that economic well-being is enhanced if country in the production
each country's citizens produce that which they have a of any good or service.
comparative advantage in producing relative to the citizens of
other countries, and then trade production.

47) Negotiation of the terms of Brexit with the EU include

which of the following key agreements?

C) no hard border
A) a customs union between the UK and the EU between Northern Ireland
should be in place until an alternative long-term relationship and the Republic of Ireland
can be established D) all of the
B) an end to free movement of people above

48) Brexit has some serious difficulties associated with

free trade and global integration that espouses

countries.
A) free movements of goods, services, capital and D) none of the
people across countries. above
B) free movements of goods and services only.
C) free movments of capital and people across

49) A multinational firm can be defined as a firm that

D) incorporated
A) invests short-term cash inflows in more than one in one country and has
currency. production and sales
B) has sales affiliates in several countries. operations in several other
C) is incorporated in more than one country. countries.

50) An MNC may gain from its global presence by

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 know-how globally with
A) spreading R&D expenditures and advertising minimum additional costs.
costs over their global sales. D) all of the
B) pooling global purchasing power over suppliers. options
C) utilizing their technological and managerial

51) MNCs can use their global presence to

C) boost profit
A) take advantage of underpriced labor services margins and create
available in certain developing countries. shareholder value.
B) gain access to special R&D capabilities residing D) all of the
in advanced foreign counties. options

52) Financial managers of MNCs should

C) benefit from
A) learn how to manage foreign exchange and expanded investment and
political risks using proper tools and instruments. financing opportunities.
B) deal with (and take advantage of) market D) all of the
imperfections. options

53) A purely domestic firm that sources its products, sells

its products, and raises its funds domestically

C) can still face

A) can face stiff competition from a multinational exchange rate risk, just like
corporation that can source its products in one country, sell an MNC.
them in several countries, and raise its funds in a third D) all of the
country. options
B) can be more competitive than an MNC on its
home turf due to superior knowledge of the local market.

54) MNC stands for

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 D) none of the
A) Multinational Corporation. options
B) Multi-Nationalized Corporation.
C) Military National Cooperation.

55) Which is growing at a faster rate, foreign direct

investment by MNCs or international trade?

D) none of the
A) FDI by MNCs options
B) International trade
C) Since they are linked, they grow at the same rate.

56) A true MNC, with operations in dozens of different

countries

C) will pay taxes

A) must effectively manage foreign exchange risk. in only its home county.
D) none of the
B) can ignore foreign exchange risk since it is options
diversified.

57) An MNC can

C) increase
A) be a factor that increases the opportunities of the economic efficiency.
citizens of less developed countries. D) all of the
B) be a factor that increases the opportunity set of options
domestic investors.

58) Today for an MNC to produce merchandise in one product to customers in yet
country on capital equipment financed by funds raised in a other countries is
number of different currencies through issuing securities to
investors in many countries, and then selling the finished

B) extremely
A) not uncommon.

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common.
C) uncommon.
D) illegal.

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59) A corporation that can source its products in one
country, sell them in another country, and raise the funds in a
third country

D) enjoys a built-
A) is a multinational corporation. in hedge against political
B) is a domestic firm if all of the shareholders are risk.
from the same country.
C) enjoys a built-in hedge against exchange rate risk.

60) Country A can produce 10 yards of textiles or 6

pounds of food per unit of input. Compute the opportunity
cost of producing one additional unit of food instead of
textiles.

D) 0.6 yards of
A) 1.67 pounds of food per yard of textiles textiles per pound of food
B) 1.67 yards of textiles per pound of food
C) 0.6 pounds of food per yard of textiles

61) The gains from trade

C) are smaller
A) are likely realized in the long run when workers than the costs of
and firms have had the time to adjust to the new competitive adjustment.
environment. D) none of the
B) are immediately realized in the short run, when options
governments drop protectionist policies.

62) Restrictions or impediments to free trade include such

things as

D) all of the
A) import quotas. options
B) import tariffs.
C) costly transportation.

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63) Suppose that country A is twice as good at producing
widgets as country B. If the currency of B is twice as valuable
as the currency of A,

C) the
A) the comparative advantage will shift to an comparative advantage
absolute advantage. could be canceled out.
B) trade will be an improved outcome for both A D) none of the
and B. options

64) Comparative advantage

service at a lower
A) is also known as relative efficiency. opportunity cost than
B) can lead to trade even in the face of absolute another party.
efficiency. D) all of the
C) exists when one party can produce a good or options

65) Country A can produce 10 yards of textiles or 6 of the following statements

pounds of food per unit of input. Country B can produce 8 is true?
yards of textiles or 5 pounds of food per unit of input. Which

Country B in the
A) Country A is relatively more efficient than production of textiles.
Country B in the production of food. D) none of the
B) Country B is relatively more efficient than options
Country A in the production of textiles.
C) Country A is relatively more efficient than

66) Underlying the theory of comparative advantage are

assumptions regarding

A) free trade

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between nations. production (land, labor,
B) that the factors of production (land, labor, capital, capital, and entrepreneurial
and entrepreneurial ability) are relatively immobile. ability) are relatively
C) that the factors of production (land, labor, capital, immobile.
and entrepreneurial ability) are relatively mobile.
D) free trade between nations and that the factors of

67) If one country is twice the size of another country and citizens of the smaller
is better at making almost everything than the benighted country,

advantage.
A) the bigger country enjoys an absolute advantage. D) there is not
enough information to
B) the bigger country enjoys an relative advantage. make a determination.
C) the bigger country enjoys a comparative

68) Country A can produce 10 yards of textiles or 6

pounds of food per unit of input. Country B can produce 8
yards of textiles or 5 pounds of food per unit of input.

Country A in the
A) Country A is relatively more efficient than production of food, but
Country B in the production of food. Country A has an absolute
B) Country B is relatively more efficient than advantage over Country B
Country A in the production of food. in the production of food
C) Country A has an absolute advantage over and textiles.
Country B in the production of food and textiles.
D) Country B is relatively more efficient than

69) Country A can produce 10 yards of textiles or 6

pounds of food per unit of input. Country B can produce 8
yards of textiles or 5 pounds of food per unit of input.

C) Country A has
A) Country A is relatively more efficient than
Country B in the production of textiles.
B) Country B is relatively more efficient than
Country A in the production of food.

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an absolute advantage over Country B in the production of
food and textiles.
D) all of the options

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70) Consider the no-trade input/output situation presented
in the following table and graph for countries A and B.
Assuming that free trade is legal; develop a scenario that will
benefit the citizens of both countries.

Input/Output without Trade

Country (lbs. or
yard;
A B Total 000,000s)
Food 30 4 7
I. Total Potential
0 0 0
Output
0 0
(lbs. or yard;
Textiles 20 4 6
000,000s)
0 0 0
Food 600 500 1,100 0 0
Textiles 1,200 500 1,700
{MISSING IMAGE}
II. Consumption

Country A should make all

A) Country B should make all the textiles and trade the food.
with Country A for food. D) Country B
B) Country A should make nothing but textiles and should make nothing but
trade with Country B for food. textiles and trade with
C) Country B should make all the textiles and Country A for food.

71) Countries A and B currently consume 400 units of are shown.

food and 400 units of textiles each and currently do not trade
with one another. The citizens of country A have to give up {MISSING IMAGE}
one unit of food to gain two units of textiles, while the Under the theory of
citizens of country B have to give up one unit of textiles to comparative advantage
gain two units of food. Their production possibilities curves

and trade with the citizens

A) The citizens of country A should make food and of country B for food.
trade with the citizens of country B for textiles. C) There are no
B) The citizens of country A should make textiles gains from trade in this

Version 1 21
example. twice as good as A at
D) A is twice as good as B at making food and B is making textiles.

72) Counties A and B currently consume 400 units of food

and 400 units of textiles each and currently do not trade with
one another. The citizens of country A have to give up one
unit of food to gain two units of textiles, while the citizens of
country B have to give up one unit of textiles to gain two
units of food. Their production possibilities curves are shown.
{MISSING IMAGE} Under the theory of comparative
advantage, if free trade is allowed, the market clearing price
(or exchange rate, if you will) between food and textiles will
be

D) two units of
A) one unit of food for one unit of textiles. food for one unit of
B) somewhere between one unit of food for two textiles.
units of textiles and two units of food for one unit of textiles.
C) one unit of food for two units of textiles.

73) Countries A and B currently consume 400 units of the international exchange
food and 400 units of textiles each and currently do with one rate between food and
another. The citizens of country A have to give up one unit of textiles is one-for-one. The
food to gain two units of textiles, while the not trade citizens increased consumption
of country B have to give up one unit of textiles to gain two following trade will be
units of food. Their production possibilities curves are shown.
{MISSING IMAGE} Suppose that trade is allowed and that

textiles.
A) an increase of 400 units of food and 400 units of B) an increase of

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1,200 units of food and 1,200 units of textiles. D) there are no
C) an increase of 800 units of food and 800 units of gains from trade in this
textiles. example.

74) In modern times, it is not a country per se but rather a country. These controllers
controller of capital and know-how that gives the country in of capital and technology
which it is domiciled a comparative advantage over another are

D) none of the
A) the state. options
B) the multinational corporations (MNCs).
C) portfolio managers of international mutual funds.

75) International trade is

they not participated in

A) a "zero-sum" game in which one country benefits international trade.
at the expense of another country. D) none of the
B) an "increasing-sum" game at which all players options
become winners.
C) prone to both countries being worse off than had

76) The doctrine of comparative advantage was first put

forth by

D) none of the
A) Adam Smith. options
B) David Ricardo.
C) Ricky Ricardo.

77) The comparative advantage argument in free trade

D) none of the
A) ignores the cost of readjustment. options
B) is a short-run argument.
C) only works for two goods at a time.

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78) If you can make a good product at a low opportunity
cost,

opportunity cost.
A) you would be well served to produce that good D) none of the
and trade for other goods. options
B) you should make something else that has a higher
value.
C) you should make something else that has a higher

79) A country like North Korea

South Korea, since North

A) likely rejects the notion of increased opportunity Korea protects its
presented by free trade. international producers.
B) engages in free trade. D) none of the
C) lies on a production possibilities curve superior to options

80) The table below shows the bushels of wheat and the I and II).
bottles of beer that North and South Dakota can produce per
day of labor under two different hypothetical situations (Cases

Case I Case II (bott

les)
South North South North
Dakota Dakota Dakota Dakota
Which state has an
Wheat 4 1 3 1
absolute advantage in
(bushels)
producing wheat in Case I?
Beer 1 2 4 2

C) Neither state
A) South Dakota D) Both states
B) North Dakota

81) The table below shows the bushels of wheat and the day of labor under two
bottles of beer that North and South Dakota can produce per

Version 1 24
different hypothetical situations (Cases I and II).

Case I Case II (bott

les)
South North South North
Dakota Dakota Dakota Dakota
Which state has an
Wheat 4 1 3 1
absolute advantage in
(bushels)
producing beer in Case I?
Beer 1 2 4 2

C) Neither state
A) South Dakota D) Both states
B) North Dakota

82) The table below shows the bushels of wheat and the
bottles of beer that North and South Dakota can produce per
day of labor under two different hypothetical situations (Cases
I and II).

Case I Case II (bott

les)
South North South North
Dakota Dakota Dakota Dakota
Which state has an
Wheat 4 1 3 1
absolute advantage in
(bushels)
producing beer in Case II?
Beer 1 2 4 2

C) Neither state
A) South Dakota D) Both states
B) North Dakota

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 Case I Case II (bott
les)
South North South North
Dakota Dakota Dakota Dakota
Which state has a
Wheat 4 1 3 1
comparative advantage in
(bushels)
producing beer in Case I?
Beer 1 2 4 2

C) Neither state
A) South Dakota D) Both states
B) North Dakota

84) The table below shows the bushels of wheat and the
bottles of beer that North and South Dakota can produce per
day of labor under two different hypothetical situations (Cases
I and II).

Case I Case II (bott

les)
South North South North
Dakota Dakota Dakota Dakota
Which state has a
Wheat 4 1 3 1
comparative advantage in
(bushels)
wheat production in Case
Beer 1 2 4 2
I?

C) Neither state
A) South Dakota D) Both states
B) North Dakota

Version 1 26
 Case I Case II
Which state has a
South North South North comparative advantage in
Dakota Dakota Dakota Dakota
wheat production in Case
Wheat 4 1 3 1
II?
(bushels)
Beer 1 2 4 2
(bottles)

Version 1 27
 C) Neither state
A) South Dakota D) Both states
B) North Dakota

86) The table below shows the bushels of wheat and the
bottles of beer that North and South Dakota can produce per
day of labor under two different hypothetical situations (Cases
I and II).

Case I Case II (bott

les)
South North South North
Dakota Dakota Dakota Dakota
What is the relative price
Wheat 4 1 3 1
of wheat in North Dakota
(bushels)
prior to trade in Case II?
Beer 1 2 4 2

D) 1 bushel of
A) 2 bushels of wheat = ½ bottle of beer wheat = 2 bottles of beer
B) ½ bushel of wheat = 2 bottles of beer
C) 1 bushel of wheat = ½ bottle of beer

87) The table below shows the bushels of wheat and the
bottles of beer that North and South Dakota can produce per
day of labor under two different hypothetical situations (Cases
I and II).

Case I Case II (bott

les)
South North South North
Dakota Dakota Dakota Dakota
Wheat 4 1 3 1
(bushels)
Beer 1 2 4 2

Version 1 28
 each other, what is the
For case II, in what range must the "international" price of possible range of prices?)
wheat fall? ( i.e., if North and South Dakota trade only with

and 1 bushel of wheat = ½

A) Between 1 bushel of wheat = 4/3 bottles of beer bottles of beer
and 1 bushel of wheat = 2 bottles of beer D) none of the
B) Between 1 bushel of wheat = 3/4 bottles of beer options
and 1 bushel of wheat = 2 bottles of beer
C) Between 1 bushel of wheat = 3/4 bottles of beer

88) The table below shows the bushels of wheat and the
bottles of beer that North and South Dakota can produce per
day of labor under two different hypothetical situations (Cases
I and II).

Case I Case II (bott

les)
South North South North For case II, let the
Dakota Dakota Dakota Dakota
international price be 1
Wheat 4 1 3 1
bottle = 1 bushel. Derive
(bushels)
South Dakota's "trading
Beer 1 2 4 2
possibilities curve."

South Dakota
A) Option A
A B C D B) Option B
Wheet (bushels) 3 3 4 1
C) Option C
Beer (bottles) 4 3 4 2
D) Option D

Version 1 29
 Case I Case II For case II, let the
international price be 1
South North South North bottle = 1 bushel. Derive
Dakota Dakota Dakota Dakota
North Dakota's "trading
Wheat 4 1 3 1
possibilities curve."
(bushels)
Beer 1 2 4 2
(bottles)

Version 1 30
 North Dakota
A) Option A
A B C D B) Option B
Wheat (bushels) 2 3 1 2
C) Option C
Beer (bottles) 4 3 2 2
D) Option D

90) The first two columns give the maximum daily

amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely
specialize in one or another product. The last two columns
give each country's consumption without trade.

Max Max Bee Beer consumption South 1 k 8 k 6 k 4 b

imu imu r without trade ern 2 e 0 e 0 e 0 o
m m con Irela 0 g 0 g 0 g 0 t
bee whi sum nd 0s s s t
r ske pti l
pro y on e
duc pro wit s
tio duc hou
n tio t
n tra
de What is the price of beer
Northern 50 ke 15 ke 300 keg 600 bott without trade in Southern
Ireland 0 gs 00 gs s les Ireland?

D) none of the
A) 2 bottles of whiskey = 3 kegs of beer options
B) 5 bottles of whiskey = 12 kegs of beer
C) 1 bottle of whiskey = 1 kegs of beer

Version 1 31
 Max Max Bee Beer consumption
imu imu r without trade What is the price of beer
m m con without trade in Northern
bee whi sum
Ireland?
r ske pti
pro y on
duc pro wit
tio duc hou
n tio t
n tra
de
Northern 50 ke 15 ke 300 keg 600 bott
Ireland 0 gs 00 gs s les
Southern 12 ke 80 ke 600 keg 400 bott
Ireland 00 gs 0 gs s les

Version 1 32
 D) none of the
A) 2 bottles of whiskey = 3 kegs of beer options
B) 5 bottles of whiskey = 12 kegs of beer
C) 2 bottles of whiskey = 1 keg of beer

92) The first two columns give the maximum daily

amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely
specialize in one or another product. The last two columns
give each country's consumption without trade.

Max Max Bee Beer consumption South 1 k 8 k 6 k 4 b

imu imu r without trade ern 2 e 0 e 0 e 0 o
m m con Irela 0 g 0 g 0 g 0 t
bee whi sum nd 0s s s t
r ske pti l
pro y on e
duc pro wit s
tio duc hou
n tio t
n tra
de In which product does
Northern 50 ke 15 ke 300 keg 600 bott Northern Ireland have a
Ireland 0 gs 00 gs s les comparative advantage in
producing?

C) Neither
A) Beer D) Both
B) Whiskey

93) The first two columns give the maximum daily

amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely
specialize in one or another product. The last two columns
give each country's consumption without trade.

Max Max Bee Beer consumption

imu imu r without trade
m m con

Version 1 33
 bee whi sum
r ske pti
pro y on
duc pro wit Suppose that trade occurs.
tio duc hou Each country completely
n tio t specializes and 500 kegs of
n tra beer are traded for 500
de bottles of whiskey. What is
Northern 50 ke 15 ke 300 keg 600 bott
the international price of
Ireland 0 gs 00 gs s les
Southern 12 ke 80 ke 600 keg 400 bott
beer?
Ireland 00 gs 0 gs s les

D) 1 bottle of
A) 1 bottle of whiskey = 1 keg of beer whiskey = 3 kegs of beer
B) 3 bottles of whiskey = 1 keg of beer
C) 2/3 bottle of whiskey = 1 keg of beer

94) The first two columns give the maximum daily

amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely
specialize in one or another product. The last two columns
give each country's consumption without trade.

Max Max Bee Beer consumption North 5 k 1 k 3 k 6 b

imu imu r without trade ern 0 e 5 e 0 e 0 o
m m con Irela 0 g 0 g 0 g 0 t
bee whi sum nd s 0s s t
r ske pti l
pro y on e
duc pro wit s
tio duc hou South 1 k 8 k 6 k 4 b
n tio t ern 2 e 0 e 0 e 0 o
n tra Irela 0 g 0 g 0 g 0 t
de nd 0s s s t
l

Version 1 34
 es
What is the cost of
Northern Ireland producing
one additional bottle of
whiskey?

C) 1 kegs of beer
A) 0.33 kegs of beer D) 3 kegs of beer
B) 0.66 kegs of beer

95) The first two columns give the maximum daily

amounts of beer and whiskey that Southern Ireland and
Northern Ireland can produce when they completely
specialize in one or another product. The last two columns
give each country's consumption without trade.

Max Max Bee Beer consumption South 1 k 8 k 6 k 4 b

imu imu r without trade ern 2 e 0 e 0 e 0 o
m m con Irela 0 g 0 g 0 g 0 t
bee whi sum nd 0s s s t
r ske pti l
pro y on e
duc pro wit s
tio duc hou
n tio t
n tra
de What is the increased
Northern 50 ke 15 ke 300 keg 600 bott number of goods available
Ireland 0 gs 00 gs s les in Northern Ireland after
trade?

of beer
A) 400 more bottles of whiskey and 200 more kegs D) 300 more
of beer bottles of whiskey and 300
B) 1,000 more bottles of whiskey and 500 more kegs more kegs of beer
of beer
C) 200 more bottles of whiskey and 400 more kegs

96) The first two columns give the maximum daily amounts of beer and

Version 1 35
whiskey that Southern Ireland and Northern Ireland can consumption without trade.
produce when they completely specialize in one or another
product. The last two columns give each country's

Max Max Bee Beer consumption

imu imu r without trade Suppose that Northern
m m con Ireland and Southern
bee whi sum
Ireland each have 1,000
r ske pti
hours of labor per day.
pro y on
duc pro wit Southern workers are paid
tio duc hou €1 per day and Northern
n tio t workers are paid £1 per
n tra day. What is the
de approximate exchange rate
Northern 50 ke 15 ke 300 keg 600 bott associated with an
Ireland 0 gs 00 gs s les international price of one
Southern 12 ke 80 ke 600 keg 400 bott
keg of beer = 1 bottle of
Ireland 00 gs 0 gs s les
whiskey?

C) €1 = £1
A) €1.14 = £1 D) none of the
B) €0.80 = £1 options

97) Consider a dentist and a 14-year old boy. The dentist boy to mow his lawn at
can make $100 per hour drilling teeth and the 14-year old boy any price less than $100,
can make $2 per hour picking up used aluminum cans. The but more than $4
dentist can mow his half-acre lot in one hour. The 14-year old
boy can mow the lawn in two hours. If the dentist hires the

D) all of the
A) both he and the boy are better off. options
B) the dentist would be exploiting the boy.
C) the boy would be exploiting the dentist.

98) Consider the no-trade input/output situation presented

in the following table and graph for South and North
Carolina. Assume that free trade is legal.

Version 1 36
Input/Output without Trade

Country (lbs. or
yards;
South North Total 000,000s)
Carolin Carolin Guns 25 20 4
a a 0 0 5
I. Total Potential 0
Output Butter 50 15 6
(lbs. or yards; 0 0 5
000,000s) 0
Guns 500 250 750
Butter 1,000 750 1,750 Which state is better at
II. Consumption making guns?

C) The states are

A) South Carolina equally good at making
B) North Carolina guns.

99) Consider the no-trade input/output situation presented

in the following table and graph for South and North
Carolina. Assume that free trade is legal.

Input/Output without Trade

Country Guns 50 25 7
0 0 5
South North Total 0
Carolin Carolin Butter 1, 75 1
a a 00 0 ,
I. Total Potential 0 7
Output 5
(lbs. or yards; 0
000,000s) II.

Version 1 37
Consumption
(lbs. or yards; How much does it cost for
000,000s) North Carolina to produce
Guns 250 200 450 one gun?
Butter 500 150 650

D) none of the
A) 3 pounds of butter options
B) .33 pounds of butter
C) 1.33 pounds of butter

100) Consider the no-trade input/output situation presented

in the following table and graph for South and North
Carolina. Assume that free trade is legal.

Input/Output without Trade

Country (lbs. or
yards;
South North Total 000,000s)
Carolin Carolin Guns 25 20 4
a a 0 0 5
I. Total Potential 0
Output Butter 50 15 6
(lbs. or yards; 0 0 5
000,000s) 0
Guns 500 250 750
Butter 1,000 750 1,750 What is the relative price
II. Consumption of a gun in terms of butter
in South Carolina?

D) 2 guns cost 1
A) 1 gun costs 3 pounds of butter. pounds of butter.
B) 3 guns cost 1 pounds of butter.
C) 1 gun costs 2 pounds of butter.

101) Consider the no-trade input/output situation presented Carolina. Assume that free
in the following table and graph for South and North trade is legal.

Version 1 38
Input/Output without Trade

Country (lbs. or
yards;
South North Total 000,000s)
Carolin Carolin Guns 25 20 4
a a 0 0 5
I. Total Potential 0
Output Butter 50 15 6
(lbs. or yards; 0 0 5
000,000s) 0
Guns 500 250 750
Butter 1,000 750 1,750 What is the relative price
II. Consumption of a pound of butter in
terms of guns in North
Carolina?

D) 2 guns costs
A) 1 pound of butter costs 0.33 guns. 0.66 pounds of butter.
B) 1 gun costs 0.33 pounds of butter.
C) 1 pound of butter costs 0.66 guns.

Version 1 39
Answer Key

Test name: Chapter 01 Test Bank

1) D
2) D
3) C
4) A
5) B
6) B
7) A
8) D
9) D
10) A
11) A
12) D
13) D
14) D
15) A
16) B
17) B
18) D
19) C

Version 1 40
20) B
21) C
22) A
23) A
24) D
25) D
26) A
27) C
28) B
29) D
30) D
31) D
32) A
33) D
34) D
35) D
36) B
37) D
38) A
39) B
40) A

Version 1 41
41) D
42) A
43) A
44) D
45) A
46) C
47) D
48) A
49) D
50) D
51) D
52) D
53) D
54) A
55) A
56) A
57) D
58) A
59) A
60) B
61) A

Version 1 42
62) D
63) C
64) D
65) C
66) D
67) A
68) D
69) D
70) B
71) B
72) B
73) A
74) B
75) B
76) B
77) A
78) A
79) A
80) A
81) B
82) A

Version 1 43
83) B
84) A
85) A
86) D
87) A
88) C
89) D
90) A
91) C
92) B
93) A
94) A
95) A
96) A
97) A
98) A
99) A
100) C
101) A

Version 1 44