Sample Questions

February 1, 2009

Midterm practice

1.1

True/False Quiz

Evaluate all responses separately and decide if each statement is either true or false. Each
correct evaluation receives one point.
1. Consider two kingdoms (Gondor and Rohan) that trade with each other. Assume
there are no other (civilized) countries in the world and labour is the only input. Productivities per hour in the three undifferentiated goods are shown in the first three data columns
and wages per hour are in the last column. Trade costs are about 1% of the value of the goods.

bridles
5
Rohan
Gondor
10

horseshoes
15
20

saddles wages (Gold pieces)

20
6
30
9

Which situations below are consistent with each countrys competitive advantages?
1. Gondor and Rohan can both gain from trading with each other
2. Gondor will export bridles to Rohan and import horseshoes
3. Gondor will export bridles and horseshoes and import saddles from Rohan
4. Gondor will export saddles and import horseshoes and bridles from Rohan
5. Rohan will import all three goods because it has comparatively lower productivity (high
opportunity cost)
6. There are no gains from trade in saddles.

2. Beef is pasture-land intensive and paper is forest-land intensive. The following statements are based on the 2005 data shown in the table below.
Country
Russia
Brazil
World

Pasture land Forest land

GDP
(mil. hec.) (mil. hec.) (bil USD)
92
800
765
197
500
882
3432
3900
44795

1. Based on the share test, both Russia and Brazil should be net exporters of beef to
the rest of the world.
2. Russia has absolute abundance of the factor pasture land (vs Brazil).
3. Russia has absolute abundance of forest land (vs Brazil).
4. The ratio test suggests that Russia should export beef to Brazil and import paper.
5. Brazil will be able to charge higher prices for beef because it has an absolute advantage
in pasture land.
6. In long-run equilibrium, the Russia-Brazil exchange rate should be in the range of 0.47
(= 92/197) and 1.6 (= 800/500) Rubles/Reals.
3. According to empirical research on international and interprovincial trade flows based
on the Gravity Equation,
1. the volume of trade between neighbouring British Columbia and Washington State
should be about the same as between neighbouring Ontario and Michigan.
2. doubling distance between countries decreases trade by about half.
3. trade flows are proportional to the economic size of the importing country, but not the
exporting country.
4. there remains a significant border effect after adjusting for distance and size of the
economies involved.
5. the direction of trade can be predicted well, but not its volume.
6. Distance effects on trade in goods were important before the 1990s but have since been
eliminated by the communication revolution (fax, internet, teleconferencing).

1.2

Short Essays

This section contains claims that can be true, false, or uncertain. Explain in detail why the
statement is true, false, or uncertain. Make sure that you address all relevant issues, and
identify their relative importance. Factual statements at the beginning of each question are
put in italics to distinguish them from the statement that you must evaluate.
1. The product life cycle theory is out of date in todays global business environment.
Nowadays, multinational enterprises should immediately manufacture new products in
low-wage countries.
2. When agreeing on the terms for an export to an unfamiliar foreign buyer, the exporter
should insist that the deal is carried out on open account, and that the price should
be quoted in home (export-country) currency.
3. A Canadian company, CanCo, is facing anti-dumping duties on its export of widgets
from Canada to the United States. The U.S. Department of Commerce has issued a
preliminary finding that CanCo is selling widgets below normal value.
The best strategy for CanCo is to exit the U.S. market.
4. The series of Harry Potter books has been translated into 60 languagesout of an estimated 266 languages with more than a million speakers. The Potter books have sold an
estimated 300 million copies worldwide.
According to Levitt and the principles of market adaptation taught in Commerce 498,
the book should be translated into all 266 languages.

1.3

Numerical Questions

1. Consider the productivity matrix below analyze comparative advantage.

(1)Suppose that the target shoe output is 18000 shoes. how many employees will you need
in Korea and how many in Thailand (using comparative-advantage based specialization)?
Comment on your results.
(2)start with the same productivity matrix change just one number for Korea so that there
is no comparative advantage (or disadvantage) in either activity.

Uppers
Korea
15
Thailand
10

Soles
45
20

2. Soccer ball manufacturing takes two steps. First, a bladder is made by blowing air into a
mold containing latex. Then synthetic leather panels (20 hexagons and 12 pentagons) are cut
and stitched together into covers into which the bladder is inserted. Each ball consists of one
bladder (B) and one cover (C). There 120 workers in the Malaysian factory and 1200 workers
at the Pakistan factory. In each factory a worker can stitch covers or mold bladders.

Task:
bladders (B) covers (C)
Malaysia (M)

36

12

Pakistan (P)

Factory:

1. What allocation of worker tasks at each factory will maximize output given the number
of employees in each factory?
2. What is the increase in productivity relative to self-sufficiency?
3. Calculate and depict on a line the range of relative wages where both plants should be
operated once workers can be hired and fired.
4. If total output is to be 3600 soccer balls in the long run, how many employees should
be used in each factory and what should they be doing?

Final Exam Practice

2.1

T/F Quiz

1. Suppose that the 4-disc Fellowship of the Ring DVD set retails for 27 in the United
Kingdom, where it is manufactured, and retails for 35 Euros in France. The current exchange
rates are (approximately) .45 /C$. and .7 Euros/C$. The difference in prices...
1. could be caused by short-run fluctuations in the exchange rate.
2. cannot be calculated because we do not know the /Euro exchange rate.
3. could be due to high French tariffs on UK goods.
4. is extremely unlikely because DVDs have low transport costs relative to their value.
5. could be caused by higher retailing costs and/or margins in France.
6. could be caused by higher retailing costs and/or margins in the UK.

2.2

Short Essays

This section contains claims that can be true, false, or uncertain. Explain in detail why the
statement is true, false, or uncertain. Make sure that you address all relevant issues, and
identify their relative importance. Factual statements at the beginning of each question are
put in italics to distinguish them from the statement that you must evaluate.
1. Dieter, a multinational firm from an exemption-system home country, is considering
whether to locate a sprocket factory in the country of Laranja or the country of Apfel.
If it chooses Laranja, it would generate before-tax profits of $10m. Laranjas corporate
tax rate is normally 50% but it sometimes gives foreign investors tax-free status (zero
taxes). The cost to the Laranja government of attaching the Dieter sprocket factory
to the national electricity grid, sewer system, and road network is $8m. The Laranja
government values the job creation from the Sprockets factory as equivalent to $6m.
Before Dieter invests, the Laranja government will commit to a tax rate. If Dieter
chooses Apfel, its after tax profit will be $7m and Dieter knows this is not negotiable.
In a strategy meeting, VP Giles Rupert says that Dieter should insist on tax-free status
in Laranja. To enhance its bargaining position, Rupert says Dieter should create a
strategic alternative by spending $1m now to find a potential factory site in Apfel.
CFO Summer Buffet suggests that Dieter should be less greedy and ask for tax relief that
lowers the effective rate to 25%.
Claim: Rupert is right. [Hint: draw the game tree, its payoffs, and equilibrium.]
5

2. The Consumer price index of Canada in 2005 is 107.0 (year 2000 value was 100). The
consumer price index of Japan is 98.0 (2000 value was 100).
Claims: These figures imply that prices are lower in Japan. The Japanese exchange rate
should appreciate until it reaches PPP levels of 107.0/98.0 =1.092 Yen/$.