Unit 1 practice test: Basic Economic Concepts

With input data, the absolute advantage goes to whoever needs fewer resources per unit: 1 hour beats 2.

• Fenwick, because it needs more hours per chair: More hours per unit means less efficient, not more.
• Correct: Ellis, because it needs 1 hour per chair to Fenwick's 2: Right: fewer hours per chair.
• Fenwick, because it has the lower opportunity cost of chairs: Lower opportunity cost is comparative advantage, not absolute advantage.
• Neither, because both need hours to make chairs: Absolute advantage compares the hours needed, and Ellis needs fewer.

A chair costs Ellis $\frac{1}{2}$ of a table and Fenwick $\frac{2}{6}$, a third of a table, so Fenwick has the lower opportunity cost.

• Correct: Fenwick, because a chair costs it a third of a table and costs Ellis half a table: Right: a third of a table is less than half.
• Ellis, because it needs fewer hours per chair than Fenwick: Fewer hours per chair is absolute advantage.
• Ellis, because it is faster at making both goods: Being faster at both gives Ellis the absolute advantage in both, not the comparative advantage in both.
• Fenwick, because it needs more hours to make a table: Hours per table alone do not give the cost of a chair.

Gains from trade come from comparative advantage. Ellis gives up 2 chairs per table; if it can get a chair for less than half a table from Fenwick, it ends up with more of both.

• Nothing: a country with the absolute advantage in both goods gains nothing from trading with others: Both sides can gain whenever their opportunity costs differ.
• Ellis gains if Fenwick also has an absolute advantage in something: Absolute advantage is not needed for gains from trade.
• Trade helps Ellis if it switches to making chairs: Ellis's comparative advantage is in tables, so it gains by making tables.
• Correct: Ellis gains by making tables and buying chairs at a price below its own opportunity cost: Right: comparative advantage, not absolute advantage, drives the gains.

When car trips cost more, some riders switch to scooters, a substitute: demand for scooter rides shifts right.

• It decreases, because gasoline and scooter rides are complements for riders: Complements are used together; scooters replace car trips instead.
• The quantity demanded rises along the same curve: The scooter price did not change, so this is a shift, not a movement.
• Correct: It increases, because scooter rides are a substitute for car trips: Right: a dearer substitute raises demand.
• It does not change, because scooters do not use gasoline: The link is through car trips, which compete with scooter rides.

The number of buyers is a determinant of demand: more buyers shift demand right.

• Demand decreases, because students have low incomes: Even students with low incomes add riders the market did not have.
• Correct: Demand increases, because there are more buyers: Right: more buyers, more rides wanted at every price.
• Supply increases, because more scooters are needed: The scenario is about riders, the buyers; it says nothing about scooter makers.
• Quantity demanded rises because the price falls: No price change is described for this event.

Expectations are a determinant of demand. Expecting a lower price soon, buyers put off rides now: today's demand shifts left.

• Correct: It decreases, because riders wait for the lower price: Right: buyers delay purchases until the price falls.
• It increases, because riders expect a bargain: The bargain is next month, so buyers wait for it.
• It is unchanged until the price of a ride actually falls: Expectations shift demand before the price changes.
• The quantity demanded rises along the curve: The price has not changed yet, so there is no movement along the curve.

The good's own price is on the vertical axis, so a higher price moves riders up along the same demand curve.

• A shift of the demand curve to the left: The ride price is on the axis, so it does not shift demand.
• A shift of the demand curve to the right: A higher price does not raise demand; it lowers the quantity demanded.
• A movement down along the demand curve to a larger quantity demanded: Down along the curve would be a lower price.
• Correct: A movement up along the demand curve to a smaller quantity demanded: Right: a movement along the curve.