ECON 201 First Midterm Practice Questions
Comparative Advantage
1. Orville and Wilbur engage in two activities, bicycling and flying. They have the following production possibilities in a year:
Bicycling Flying
Orville 20 30
Wilbur 30 24
A. Find the opportunity cost of each activity for each person.
B. Who has comparative advantage in each activity?
C. If each must do 10 units of cycling in a year (because that’s how they originally earned a living) how much flying can they do with no trade?
D. What are the gains from specialization and trade?
2. Angus and Malcolm are young brothers who have farms on opposite sides of a Highway somewhere in Australia. They grow oats and barley and have the following potential output in a year:
Barley Oats
Angus 400 560
Malcolm 200 180
A. Find the opportunity cost of each activity for each person.
B. Who has comparative advantage in each activity?
C. If each must do 100 units of barley in a year, what quantity of oats can they grow with no trade?
D. What are the gains from specialization and trade, holding total barley production constant?
Inflation and Stuff
3. Fill in the missing gaps in the following table and answer the questions.
Year / Nominal GDP / Price Level / Real GDP1989 / 2300 / 91
1990 / 2400 / 2526
1991 / 98 / 2551
1992 / 2450 / 100
1993 / 2550 / 2500
1994 / 105 / 2524
1995 / 2750 / 109
A. Calculate the inflation rate between 1989 and 90, between 90 and 91 and so on.
B. During which periods does it appear there was a recession?
4. Consider a basket of goods that includes five pounds of coffee, a package of aspirin and a case of beer. The table below shows the prices of these goods in each of six years. Calculate the cost of the basket, the resulting inflation rates between the years and the price levels using the third year as the base year.
Year / Cost Per Pound of Coffee / Cost per Container of Aspirin / Cost per Case of Beer1 / $2 / $0.75 / $18
2 / $2.10 / $0.80 / $19
3 / $2.20 / $1.00 / $24
4 / $2.30 / $1.40 / $20
5 / $2.40 / $2.00 / $21
6 / $2.50 / $1.80 / $22
Answers
1.
Bicycling Flying Cost of 1B Cost of 1F
Orville 20 30 30/20=1.5 F 2/3 B*
Wilbur 30 24 24/30=0.8 F* 1.25 B
No trade: O 10B 15F
W 10B 16F 31F
Trade: O 0B 30F
W 20B 8F 38F Gain of 7F.
2.
Barley Oats Cost of 1B Cost of 1 O
Angus 400 560 560/400=1.4O 5/7 B*
Malcolm 200 180 180/200= 0.9O* 10/9 B
No trade: A 100B 420O
M 100B 90O 510O
Trade: A 0B 560O
M 200B 0O 560O +50O
3.
A.
Year / Nominal GDP / Price Level / Real GDP / Inflation1989 / 2300 / 91 / 2527
1990 / 2400 / 95 / 2526 / 4.40%
1991 / 2500 / 98 / 2551 / 3.16%
1992 / 2450 / 100 / 2450 / 2.04%
1993 / 2550 / 102 / 2500 / 2.00%
1994 / 2650 / 105 / 2524 / 2.94%
1995 / 2750 / 109 / 2523 / 3.81%
B. Real GDP fell from 89 to 90, from 91 to 92 and from 94 to 95.
4.
1 / $2 / $0.75 / $18 / $28.75 / 79.9
2 / $2.10 / $0.80 / $19 / $30.30 / 5.39% / 84.2
3 / $2.20 / $1.00 / $24 / $36.00 / 18.81% / 100.0
4 / $2.30 / $1.40 / $20 / $32.90 / -8.61% / 91.4
5 / $2.40 / $2.00 / $21 / $35.00 / 6.38% / 97.2
6 / $2.50 / $1.80 / $22 / $36.30 / 3.71% / 100.8