Briefly explain the principle of comparative advantage.
What will be an ideal response?
POSSIBLE RESPONSE: David Ricardo's principle of comparative advantage shows that beneficial trade can occur even if one country is worse (less productive) at producing all products. The principle of comparative advantage is based on the importance of opportunity cost-the number of units of other products that must be forgone to produce more of a particular product. The principle states that a country will export products that it can produce at low opportunity cost in return for imports of products that it would otherwise produce at high opportunity cost.
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The figure above shows the costs for a grower in the perfectly competitive turnip industry. If the price is $1,400 for a ton of turnips, the firm is
A) making an economic profit. B) making zero economic profit. C) incurring an economic loss. D) More information is needed to determine if the firm is making a positive economic profit, zero economic profit, or incurring an economic loss.
Opportunity cost is defined as
A) the value of the next-best alternative that must be sacrificed to attain a want. B) the least-costly means to produce output. C) the value of the output currently received by an individual or a corporation. D) the return from a given unit of labor.
Suppose your expenses for this term are as follows: tuition: $5,000, room and board: $3,000, books and other educational supplies: $500. Further, during the term, you can only work part-time and earn $4,000 instead of your full-time salary of $10,000
What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college? A) $5,500 B) $8,500 C) $11,500 D) $14,500
The free-trade agreement signed by Canada, Mexico, and the United States in 1992 is known as
A. NAFTA. B. GATT. C. DOHA. D. WTO.